Mitigation of Climate Change Chapter3

Working Group III Mitigation of Climate Change
Chapter 3

Social, Economic and Ethical
Concepts and Methods

Note:
ThisdocumentisthecopyeditedversionofthefinaldraftReport,dated17December2013,ofthe
Working Group III contribution to the IPCC 5th Assessment Report "Climate Change 2014:
MitigationofClimateChange"thatwasacceptedbutnotapprovedindetailbythe12thSessionof
WorkingGroupIIIandthe39thSessionoftheIPCCon12April2014inBerlin,Germany.Itconsists
ofthefullscientific,technicalandsocioeconomicassessmentundertakenbyWorkingGroupIII.
The Report should be read in conjunction with the document entitled Climate Change 2014:
Mitigation of Climate Change. Working Group III Contribution to the IPCC 5th Assessment Report
ChangestotheunderlyingScientific/TechnicalAssessmenttoensureconsistencywiththeapproved
Summary for Policymakers (WGIII: 12
th
/Doc. 2a, Rev.2) and presented to the Panel at its 39th
Session. This document lists the changes necessary to ensure consistency between the full Report
and the Summary for Policymakers, which was approved linebyline by Working Group III and
acceptedbythePanelattheaforementionedSessions.
Beforepublication,theReport(includingtext,figuresandtables)willundergofinalqualitycheckas
wellasanyerrorcorrectionasnecessary,consistent with theIPCCProtocolforAddressingPossible
Errors.PublicationoftheReportisforeseeninSeptember/October2014.
Disclaimer:
Thedesignationsemployedandthepresentationofmaterialonmapsdonotimplytheexpressionof
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AreportacceptedbyWorkingGroupIIIoftheIPCCbutnotapprovedindetail.
FinalDraft Chapter3 IPCCWGIIIAR5
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Chapter: 3
Title: Social,Economic,andEthicalConceptsandMethods
Authors: CLAs: CharlesKolstad,KevinUrama
LAs: JohnBroome,AnnegreteBruvoll,MichelineCario Olvera,Don
Fullerton,ChristianGollier,WilliamMichaelHanemann,Rashid
Hassan,FrankJotzo,MizanR.Khan,LukasMeyer,LuisMundaca
CAs: PhilippeAghion,HuntAllcott,GregorBetz,SeverinBorenstein,
AndrewBrennan,SimonCaney,DanFarber,AdamJaffe,Gunnar
Luderer,AxelOckenfels,DavidPopp
REs: MarleneAttzs,DanielBouille,SnorreKverndokk
CSAs: SheenaKatai,KatyMaher,LindseySarquilla
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Chapter3: Social,Economic,andEthicalConceptsandMethods
Contents
ExecutiveSummary............................................................................................................................5
3.1Introduction..................................................................................................................................9
3.2Ethicalandsocioeconomicconceptsandprinciples.................................................................10
3.3Justice,equityandresponsibility................................................................................................12
3.3.1Causalandmoralresponsibility..........................................................................................12
3.3.2Intergenerationaljusticeandrightsoffuturepeople.........................................................12
3.3.3Intergenerationaljustice:distributivejustice.....................................................................13
3.3.4Historicalresponsibilityanddistributivejustice.................................................................14
3.3.5Intragenerationaljustice:compensatoryjusticeandhistoricalresponsibility..................15
3.3.6Legalconceptsofhistoricalresponsibility..........................................................................16
3.3.7Geoengineering,ethics,andjustice....................................................................................17
3.4Valuesandwellbeing..................................................................................................................18
3.4.1Nonhumanvalues..............................................................................................................19
3.4.2Culturalandsocialvalues....................................................................................................20
3.4.3Wellbeing............................................................................................................................20
3.4.4Aggregationofwellbeing....................................................................................................21
3.4.5Lifetimewellbeing...............................................................................................................21
3.4.6Socialwelfarefunctions......................................................................................................21
3.4.7Valuingpopulation..............................................................................................................23
3.5Economics,rights,andduties.....................................................................................................24
3.5.1Limitsofeconomicsinguidingdecisionmaking.................................................................25
3.6Aggregationofcostsandbenefits..............................................................................................26
3.6.1Aggregatingindividualwellbeing........................................................................................26
3.6.1.1Monetaryvalues..........................................................................................................27
3.6.2Aggregatingcostsandbenefitsacrosstime........................................................................30
3.6.3Cobenefitsandadversesideeffects..................................................................................36
3.6.3.1Ageneralframeworkforevaluationofcobenefitsandadversesideeffects............36
3.6.3.2Thevaluationofcobenefitsandadversesideeffects................................................37
3.6.3.3Thedoubledividendhypothesis..................................................................................39
3.7Assessingmethodsofpolicychoice............................................................................................40
3.7.1Policyobjectivesandevaluationcriteria.............................................................................40
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3.7.1.1Economicobjectives....................................................................................................41
3.7.1.2Distributionalobjectives..............................................................................................42
3.7.1.3Environmentalobjectives............................................................................................43
3.7.1.4Institutionalandpoliticalfeasibility.............................................................................44
3.7.2Analyticalmethodsfordecisionsupport............................................................................44
3.7.2.1Quantitativeorientedapproaches..............................................................................44
3.7.2.2Qualitativeapproaches................................................................................................46
3.8Policyinstrumentsandregulations............................................................................................46
3.8.1Economicincentives............................................................................................................46
3.8.1.1Emissionstaxesandpermittrading.............................................................................46
3.8.1.2Subsidies......................................................................................................................47
3.8.2Directregulatoryapproaches..............................................................................................48
3.8.3Informationprogrammes....................................................................................................48
3.8.4Governmentprovisionofpublicgoodsandservices,andprocurement............................48
3.8.5Voluntaryactions................................................................................................................48
3.8.6Policyinteractionsandcomplementarity...........................................................................48
3.8.7Governmentfailureandpolicyfailure................................................................................49
3.8.7.1Rentseeking................................................................................................................49
3.8.7.2Policyuncertainty........................................................................................................49
3.9Metricsofcostsandbenefits.....................................................................................................50
3.9.1Thedamagesfromclimatechange.....................................................................................51
3.9.2Aggregateclimatedamages................................................................................................54
3.9.3Theaggregatecostsofmitigation.......................................................................................57
3.9.4Socialcostofcarbon...........................................................................................................60
3.9.5TheReboundeffect.............................................................................................................60
3.9.6Greenhousegasemissionsmetrics.....................................................................................61
3.10Behaviouraleconomicsandculture.........................................................................................64
3.10.1Behaviouraleconomicsandthecostofemissionsreduction...........................................65
3.10.1.1Consumerundervaluationofenergycosts................................................................65
3.10.1.2Firmbehaviour...........................................................................................................66
3.10.1.3Nonpriceinterventionstoinducebehaviouralchange............................................66
3.10.1.4Altruisticreductionsofcarbonemissions..................................................................66
3.10.1.5Humanabilitytounderstandclimatechange............................................................67
3.10.2Socialandculturalissues...................................................................................................68
3.10.2.1Customs.....................................................................................................................68
3.10.2.2Indigenouspeoples....................................................................................................68
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3.10.2.3WomenandClimateChange.....................................................................................69
3.10.2.4Socialinstitutionsforcollectiveaction......................................................................69
3.11Technologicalchange...............................................................................................................70
3.11.1MarketprovisionofTC......................................................................................................70
3.11.2Inducedinnovation...........................................................................................................70
3.11.3LearningbydoingandotherstructuralmodelsofTC......................................................71
3.11.4EndogenousandexogenousTCandgrowth.....................................................................71
3.11.5PolicymeasuresforinducingR&D....................................................................................72
3.11.6Technologytransfer(TT)...................................................................................................72
3.12Gapsinknowledgeanddata....................................................................................................73
3.13FrequentlyAskedQuestions.....................................................................................................74
References........................................................................................................................................76
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ExecutiveSummary
Thisframingchapterdescribesthestrengthsandlimitationsofthemostwidelyusedconceptsand
methodsineconomics,ethics,andothersocialsciencesthatarerelevanttoclimatechange.Italso
providesareferenceresourcefortheotherchaptersintheFifthAssessmentReport(AR5),aswellas
fordecisionmakers.
Thesignificanceofthesocialdimensionandtheroleofethicsandeconomicsisunderscoredby
Article2oftheUnitedNationsFrameworkConventiononClimateChange,whichindicatesthatan
ultimateobjectiveoftheConventionistoavoiddangerousanthropogenicinterferencewiththe
climatesystem.Twomainissuesconfrontingsociety(andtheIPCC)are:whatconstitutesdangerous
interferencewiththeclimatesystemandhowtodealwiththatinterference.Determiningwhatis
dangerousisnotamatterfornaturalsciencealone;italsoinvolvesvaluejudgementsasubject
matterofthetheoryofvalue,whichistreatedinseveraldisciplines,includingethics,economics,and
othersocialsciences.
Ethicsinvolvesquestionsofjusticeandvalue.Justiceisconcernedwithequityandfairness,and,in
general,withtherightstowhichpeopleareentitled.Valueisamatterofworth,benefit,orgood.
Valuecansometimesbemeasuredquantitatively,forinstance,throughasocialwelfarefunctionor
anindexofhumandevelopment.
Economictoolsandmethodscanbeusedinassessingthepositiveandnegativevaluesthatresult
fromparticulardecisions,policies,andmeasures.Theycanalsobeessentialindeterminingthe
mitigationandadaptationactionstobeundertakenaspublicpolicy,aswellastheconsequencesof
differentmitigationandadaptationstrategies.Economictoolsandmethodshavestrengthsand
limitations,bothofwhicharedetailedinthischapter.
Economictoolscanbeusefulindesigningclimatechangemitigationpolicies(veryhighconfidence).
Whilethelimitationsofeconomicsandsocialwelfareanalysis,includingcostbenefitanalysis,are
widelydocumented,economicsneverthelessprovidesusefultoolsforassessingtheprosandconsof
taking,ornottaking,actiononclimatechangemitigation,aswellasofadaptationmeasures,in
achievingcompetingsocietalgoals.Understandingtheseprosandconscanhelpinmakingpolicy
decisionsonclimatechangemitigationandcaninfluencetheactionstakenbycountries,institutions
andindividuals.[Section3.2]
Mitigationisapublicgood;climatechangeisacaseofthetragedyofthecommons(high
confidence).Effectiveclimatechangemitigationwillnotbeachievedifeachagent(individual,
institutionorcountry)actsindependentlyinitsownselfishinterest,suggestingtheneedfor
collectiveaction.Someadaptationactions,ontheotherhand,havecharacteristicsofaprivategood
asbenefitsofactionsmayaccruemoredirectlytotheindividuals,regions,orcountriesthat
undertakethem,atleastintheshortterm.Nevertheless,financingsuchadaptiveactivitiesremains
anissue,particularlyforpoorindividualsandcountries.[3.1]
Analysiscontainedintheliteratureofmoralandpoliticalphilosophycancontributetoresolving
ethicalquestionsthatareraisedbyclimatechange(mediumconfidence).Thesequestionsinclude
howmuchoverallclimatemitigationisneededtoavoiddangerousinterference,howtheeffortor
costofmitigatingclimatechangeshouldbesharedamongcountriesandbetweenthepresentand
future,howtoaccountforsuchfactorsashistoricalresponsibilityforemissions,andhowtochoose
amongalternativepoliciesformitigationandadaptation.Ethicalissuesofwellbeing,justice,fairness,
andrightsareallinvolved.[3.2,3.3,3.4]
Dutiestopayforsomeclimatedamagescanbegroundedincompensatoryjusticeanddistributive
justice(mediumconfidence).Ifcompensatorydutiestopayforclimatedamagesandadaptation
costsarenotduefromagentswhohaveactedblamelessly,thenprinciplesofcompensatoryjustice
willapplytoonlysomeoftheharmfulemissions[3.3.5].Thisfindingisalsoreflectedinthe
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predominantgloballegalpracticeofattributingliabilityforharmfulemissions[3.3.6].Dutiestopay
forclimatedamagescan,however,alsobegroundedindistributivejustice[3.3.4,3.3.5].
Distributionalweightsmaybeadvisableincostbenefitanalysis(mediumconfidence).Ethical
theoriesofvaluecommonlyimplythatdistributionalweightsshouldbeappliedtomonetary
measuresofbenefitsandharmswhentheyareaggregatedtoderiveethicalconclusions[3.6.1].Such
weightingcontrastswithmuchofthepracticeofcostbenefitanalysis.
Theuseofatemporaldiscountratehasacrucialimpactontheevaluationofmitigationpolicies
andmeasures.Thesocialdiscountrateistheminimumrateofexpectedsocialreturnthat
compensatesfortheincreasedintergenerationalinequalitiesandthepotentialincreasedcollective
riskthatanactiongenerates.Evenwithdisagreementonthelevelofthediscountrate,aconsensus
favoursusingdecliningriskfreediscountratesoverlongertimehorizons(highconfidence).[3.6.2]
Anappropriatesocialriskfreediscountrateforconsumptionisbetweenoneandthreetimesthe
anticipatedgrowthrateinrealpercapitaconsumption(mediumconfidence).Thisjudgementis
basedonanapplicationoftheRamseyruleusingtypicalvaluesintheliteratureofnormative
parametersintherule.Ultimately,however,thesearenormativechoices.[3.6.2]
Cobenefitsmaycomplementthedirectbenefitsofmitigation(mediumconfidence).Whilesome
directbenefitsofmitigationarereductionsinadverseclimatechangeimpacts,cobenefitscan
includeabroadrangeofenvironmental,economic,andsocialeffects,suchasreductionsinlocalair
pollution,lessacidrain,andincreasedenergysecurity.However,whethercobenefitsarenet
positiveornegativeintermsofwellbeing(welfare)canbedifficulttodeterminebecauseof
interactionbetweenclimatepoliciesandpreexistingnonclimatepolicies.Thesameresultsapplyto
adversesideeffects.[3.6.3]
Taxdistortionschangethecostofallabatementpolicies(highconfidence).Acarbontaxora
tradableemissionspermitsystemcanexacerbatetaxdistortions,or,insomecases,alleviatethem;
carbontaxorpermitrevenuecanbeusedtomoderateadverseeffectsbycuttingothertaxes.
However,regulationsthatforgorevenue(e.g.,bygivingpermitsaway)implicitlyhavehighersocial
costsbecauseofthetaxinteractioneffect.[3.6.3]
Manydifferentanalyticmethodsareavailableforevaluatingpolicies.Methodsmaybe
quantitative(forexample,costbenefitanalysis,integratedassessmentmodelling,andmulticriteria
analysis)orqualitative(forexample,sociologicalandparticipatoryapproaches).However,nosingle
bestmethodcanprovideacomprehensiveanalysisofpolicies.Amixofmethodsisoftenneededto
understandthebroadeffects,attributes,tradeoffs,andcomplexitiesofpolicychoices;moreover,
policiesoftenaddressmultipleobjectives.[3.7]
Fourmaincriteriaarefrequentlyusedinevaluatingandchoosingamitigationpolicy(medium
confidence).Theyare:costeffectivenessandeconomicefficiency(excludingenvironmentalbenefits,
butincludingtransactioncosts);environmentaleffectiveness(theextenttowhichtheenvironmental
targetsareachieved);distributionaleffects(impactondifferentsubgroupswithinsociety);and
institutionalfeasibility,includingpoliticalfeasibility.[3.7.1]
Abroadrangeofpolicyinstrumentsforclimatechangemitigationisavailabletopolicymakers.
Theseinclude:economicincentives,directregulatoryapproaches,informationprogrammes,
governmentprovision,andvoluntaryactions.Interactionsbetweenpolicyinstrumentscanenhance
orreducetheeffectivenessandcostofmitigationaction.Economicincentiveswillgenerallybemore
costeffectivethandirectregulatoryinterventions.However,theperformanceandsuitabilityof
policiesdependsonnumerousconditions,includinginstitutionalcapacity,theinfluenceofrent
seeking,andpredictabilityoruncertaintyaboutfuturepolicysettings.Theenablingenvironment
maydifferbetweencountries,includingbetweenlowincomeandhighincomecountries.These
differencescanhaveimplicationsforthesuitabilityandperformanceofpolicyinstruments.[3.8]
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Impactsofextremeeventsmaybemoreimportanteconomicallythanimpactsofaverageclimate
change(highconfidence).Risksassociatedwiththeentireprobabilitydistributionofoutcomesin
termsofclimateresponse[WGI]andclimateimpacts[WGII]arerelevanttotheassessmentof
mitigation.Impactsfrommoreextremeclimatechangemaybemoreimportanteconomically(in
termsoftheexpectedvalueofimpacts)thanimpactsofaverageclimatechange,particularlyifthe
damagefromextremeclimatechangeincreasesmorerapidlythantheprobabilityofsuchchange
declines.Thisisimportantineconomicanalysis,wheretheexpectedbenefitofmitigationmaybe
tradedoffagainstmitigationcosts.[3.9.2]
Impactsfromclimatechangearebothmarketandnonmarket.Marketeffects(wheremarket
pricesandquantitiesareobserved)includeimpactsofstormdamageoninfrastructure,tourism,and
increasedenergydemand.Nonmarketeffectsincludemanyecologicalimpacts,aswellaschanged
culturalvalues,noneofwhicharegenerallycapturedthroughmarketprices.Theeconomicmeasure
ofthevalueofeitherkindofimpactiswillingnesstopaytoavoiddamage,whichcanbeestimated
usingmethodsofrevealedpreferenceandstatedpreference.[3.9]
Substitutabilityreducesthesizeofdamagesfromclimatechange(highconfidence).Themonetary
damagefromachangeintheclimatewillbelowerifindividualscaneasilysubstituteforwhatis
damaged,comparedtocaseswheresuchsubstitutionismoredifficult.[3.9]
DamagefunctionsinexistingIntegratedAssessmentModels(IAMs)areoflowreliability(high
confidence).Theeconomicassessmentsofdamagesfromclimatechangeasembodiedinthe
damagefunctionsusedbysomeexistingIAMs(thoughnotintheanalysisembodiedinWGIII)are
highlystylizedwithaweakempiricalfoundation.Theempiricalliteratureonmonetizedimpactsis
growingbutremainslimitedandoftengeographicallynarrow.Thissuggeststhatsuchdamage
functionsshouldbeusedwithcautionandthattheremaybesignificantvalueinundertaking
researchtoimprovetheprecisionofdamageestimates.[3.9,3.12]
Negativeprivatecostsofmitigationariseinsomecases,althoughtheyaresometimesoverstated
intheliterature(mediumconfidence).Sometimesmitigationcanlowertheprivatecostsof
productionandthusraiseprofits;forindividuals,mitigationcanraisewellbeing.Expostevidence
suggeststhatsuchnegativecostopportunitiesdoindeedexistbutaresometimesoverstatedin
engineeringanalyses.[3.9]
ExchangeratesbetweenGHGswithdifferentatmosphericlifetimesareverysensitivetothechoice
ofemissionmetric.Thechoiceofanemissionmetricdependsonthepotentialapplicationand
involvesexplicitorimplicitvaluejudgements;noconsensussurroundsthequestionofwhichmetric
isbothconceptuallybestandpracticaltoimplement(highconfidence).Intermsofaggregate
mitigationcostsalone,theGlobalWarmingPotential(GWP),witha100yeartimehorizon,may
performsimilarlytoselectedothermetrics(suchasthetimedependentGlobalTemperatureChange
PotentialortheGlobalCostPotential)ofreachingaprescribedclimatetarget;however,various
metricsmaydiffersignificantlyintermsoftheimplieddistributionofcostsacrosssectors,regions,
andovertime(limitedevidence,mediumagreement).[3.9]
Thebehaviourofenergyusersandproducersexhibitsavarietyofanomalies(highconfidence).
Understandingclimatechangeasaphysicalphenomenonwithlinkstosocietalcausesandimpactsis
averycomplexprocess.Tobefullyeffective,theconceptualframeworksandmethodologicaltools
usedinmitigationassessmentsneedtotakeintoaccountcognitivelimitationsandotherregarding
preferencesthatframetheprocessesofeconomicdecisionmakingbypeopleandfirms.[3.10]
Perceivedfairnesscanfacilitatecooperationamongindividuals(highconfidence).Experimental
evidencesuggeststhatreciprocalbehaviourandperceptionsoffairoutcomesandprocedures
facilitatevoluntarycooperationamongindividualpeopleinprovidingpublicgoods;thisfindingmay
haveimplicationsforthedesignofinternationalagreementstocoordinateclimatechange
mitigation.[3.10]
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Socialinstitutionsandculturecanfacilitatemitigationandadaptation(mediumconfidence).Social
institutionsandculturecanshapeindividualactionsonmitigationandadaptationandbe
complementarytomoreconventionalmethodsforinducingmitigationandadaptation.Theycan
promotetrustandreciprocityandcontributetotheevolutionofcommonrules.Theyalsoprovide
structuresforactingcollectivelytodealwithcommonchallenges.[3.10]
Technologicalchangethatreducesmitigationcostscanbeencouragedbyinstitutionsand
economicincentives(highconfidence).Aspollutionisnotfullypricedbythemarket,private
individualsandfirmslackincentivestoinvestsufficientlyinthedevelopmentanduseofemissions
reducingtechnologiesintheabsenceofappropriatepolicyinterventions.Moreover,imperfect
appropriabilityofthebenefitsofinnovationfurtherreducesincentivestodevelopnewtechnologies.
[3.11]
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3.1 Introduction
Thisframingchapterhastwoprimarypurposes:toprovideaframeworkforviewingand
understandingthehuman(social)perspectiveonclimatechange,focusingonethicsandeconomics;
andtodefineanddiscusskeyconceptsusedinotherchapters.Itcomplementsthetwoother
framingchapters:Chapter2onriskanduncertaintyandChapter4onsustainability.Theaudience
forthischapter(indeedforthisentirevolume)isdecisionmakersatmanydifferentlevels.
Thesignificanceofthesocialdimensionandtheroleofethicsandeconomicsisunderscoredby
Article2oftheUnitedNationsFrameworkConventiononClimateChange(UNFCCC),whichindicates
thattheultimateobjectiveoftheConventionistoavoiddangerousanthropogenicinterferencewith
theclimatesystem.Twomainissuesconfrontingsocietyare:whatconstitutesdangerous
interferencewiththeclimatesystemandhowtodealwiththatinterference.Providinginformation
toanswertheseinterrelatedquestionsisaprimarypurposeoftheIPCC.Althoughnaturalscience
helpsusunderstandhowemissionscanchangetheclimate,and,inturn,generatephysicalimpacts
onecosystems,people,andthephysicalenvironment,determiningwhatisdangerousinvolves
judgingthelevelofadverseconsequences,thestepsnecessarytomitigatetheseconsequences,and
theriskthathumanityiswillingtotolerate.Thesearequestionsrequiringvaluejudgement.
Althougheconomicsisessentialtoevaluatingtheconsequencesandtradeoffsassociatingwith
climatechange,howsocietyinterpretsandvaluesthemisanethicalquestion.
Box 3.1Dangerous interference with the climate system

Article2oftheUnitedNationsFrameworkConventiononClimateChangestatesthattheultimate
objectiveoftheConvention...istoachieve...stabilizationofgreenhousegasconcentrationsin
theatmosphereatalevelthatwouldpreventdangerousanthropogenicinterferencewiththe
climatesystem.Judgingwhetherourinterferenceintheclimatesystemisdangerous,i.e.,risks
causingaverybadoutcome,involvestwotasks:estimatingthephysicalconsequencesofour
interferenceandtheirlikelihood;andassessingtheirsignificanceforpeople.Thefirstfallstoscience,
but,astheSynthesisReportoftheIPCCFourthAssessmentReport(AR4)states,Determiningwhat
constitutesdangerousanthropogenicinterferencewiththeclimatesysteminrelationtoArticle2of
theUNFCCCinvolvesvaluejudgements(IPCC,2007,p.42).Valuejudgementsaregovernedbythe
theoryofvalue.Inparticular,valuingriskiscoveredbydecisiontheoryandisdealtwithinChapter2.
Centralquestionsofvaluethatcomewithinthescopeofethics,aswellaseconomicmethodsfor
measuringcertainvaluesareexaminedinthischapter.
Ourdiscussionofethicscentresontwomainconsiderations:justiceandvalue.Justicerequiresthat
peopleandnationsshouldreceivewhattheyaredue,orhavearightto.Forsome,anoutcomeis
justiftheprocessthatgenerateditisjust.Othersviewjusticeintermsoftheactualoutcomes
enjoyedbydifferentpeopleandgroupsandthevaluestheyplaceonthoseoutcomes.Outcome
basedjusticecanrangefrommaximizingeconomicmeasuresofaggregatewelfaretorightsbased
viewsofjustice,forexample,believingthatallcountrieshavearighttocleanair.Differentviews
havebeenexpressedaboutwhatisvaluable.Allvaluesmaybeanthropocentricortheremaybe
nonhumanvalues.Economicanalysiscanhelptoguidepolicyaction,providedthatappropriate,
adequate,andtransparentethicalassumptionsarebuiltintotheeconomicmethods.
Thesignificanceofeconomicsintacklingclimatechangeiswidelyrecognized.Forinstance,central
tothepoliticsoftakingactiononclimatechangearedisagreementsoverhowmuchmitigationthe
worldshouldundertake,andtheeconomiccostsofaction(thecostsofmitigation)andinaction(the
costsofadaptationandresidualdamagefromachangedclimate).Uncertaintyremainsabout(1)the
costsofreducingemissionsofgreenhousegases(GHGs),(2)thedamagecausedbyachangeinthe
climate,and(3)thecost,practicality,andeffectivenessofadaptationmeasures(and,potentially,
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geoengineering).Prioritizingactiononclimatechangeoverothersignificantsocialgoalswithmore
neartermpayoffsisparticularlydifficultindevelopingcountries.Becausesocialconcernsand
objectives,suchasthepreservationoftraditionalvalues,cannotalwaysbeeasilyquantifiedor
monetized,economiccostsandbenefitsarenottheonlyinputintodecisionmakingaboutclimate
change.Butevenwherecostsandbenefitscanbequantifiedandmonetized,usingmethodsof
economicanalysistosteersocialactionimplicitlyinvolvessignificantethicalassumptions.This
chapterexplainstheethicalassumptionsthatmustbemadeforeconomicmethods,includingcost
benefitanalysis(CBA),tobevalid,aswellastheethicalassumptionsthatareimplicitlybeingmade
whereeconomicanalysisisusedtoinformapolicychoice.
Theperspectiveofeconomicscanimproveourunderstandingofthechallengesofactingon
mitigation.Foranindividualorfirm,mitigationinvolvesrealcosts,whilethebenefitstothemselves
oftheirownmitigationeffortsaresmallandintangible.Thisreducestheincentivesforindividualsor
countriestounilaterallyreduceemissions;freeridingontheactionsofothersisadominant
strategy.Mitigatinggreenhousegas(GHG)emissionsisapublicgood,whichinhibitsmitigation.This
alsopartlyexplainsthefailureofnationstoagreeonhowtosolvetheproblem.
Incontrast,adaptationtendsnottosufferfromfreeriding.Gainstoclimatechangefrom
adaptation,suchasplantingmoreheattolerantcrops,aremainlyrealizedbythepartieswhoincur
thecosts.AssociatedexternalitiestendtobemorelocalizedandcontemporaneousthanforGHG
mitigation.Fromapublicgoodsperspective,globalcoordinationmaybelessimportantformany
formsofadaptationthanformitigation.Forautonomousadaptationinparticular,thegainsfrom
adaptationaccruetothepartyincurringthecost.However,publicadaptationrequireslocalor
regionalcoordination.Financialandotherconstraintsmayrestrictthepursuitofattractive
adaptationopportunities,particularlyindevelopingcountriesandforpoorerindividuals.
Thischapteraddressestwoquestions:whatshouldbedoneaboutactiontomitigateclimatechange
(anormativeissue)andhowtheworldworksinthemultifacetedcontextofclimatechange(a
descriptiveorpositiveissue).Typically,ethicsdealswithnormativequestionsandeconomicswith
descriptiveornormativequestions.Descriptivequestionsareprimarilyvalueneutral,forexample,
howfirmshavereactedtocapandtradeprogrammestolimitemissions,orhowsocietieshavedealt
withresponsibilityforactionsthatwerenotknowntobeharmfulwhentheyweretaken.Normative
questionsuseeconomicsandethicstodecidewhatshouldbedone,forexample,determiningthe
appropriatelevelofburdensharingamongcountriesforcurrentandfuturemitigation.Inmaking
decisionsaboutissueswithnormativedimensions,itisimportanttounderstandtheimplicit
assumptionsinvolved.Mostnormativeanalysesofsolutionstotheclimateproblemimplicitly
involvecontestableethicalassumptions.
Thischapterdoesnotattempttoanswerethicalquestions,butratherprovidespolicymakerswith
thetools(concepts,principles,arguments,andmethods)tomakedecisions.Summarizingtheroleof
economicsandethicsinclimatechangeinasinglechapternecessitatesseveralcaveats.While
recognizingtheimportanceofcertainnoneconomicsocialdimensionsoftheclimatechange
problemandsolutionstoit,spacelimitationsandourmandatenecessitatedfocusingprimarilyon
ethicsandeconomics.Furthermore,manyoftheissuesraisedhavealreadybeenaddressedin
previousIPCCassessments,particularlyAR2(publishedin1995).Inthepast,ethicshasreceivedless
attentionthaneconomics,althoughaspectsofbothsubjectsarecoveredinAR2.Theliterature
reviewedhereincludespreAR4literatureinordertoprovideamorecomprehensiveunderstanding
oftheconceptsandmethods.WehighlightnewdevelopmentsinthefieldsincethelastIPCC
assessmentin2007.
3.2 Ethicalandsocioeconomicconceptsandprinciples
WhenacountryemitsGHGs,itsemissionscauseharmaroundtheglobe.Thecountryitselfsuffers
onlyapartoftheharmitcauses.Itisthereforerarelyintheinterestsofasinglecountrytoreduce
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itsownemissions,eventhoughareductioninglobalemissionscouldbenefiteverycountry.Thatis
tosay,theproblemofclimatechangeisatragedyofthecommons(Hardin,1968).Effective
mitigationofclimatechangewillnotbeachievedifeachpersonorcountryactsindependentlyinits
owninterest.
Consequently,effortsarecontinuingtoreacheffectiveinternationalagreementonmitigation.They
raiseanethicalquestionthatiswidelyrecognizedandmuchdebated,namely,burdensharingor
effortsharing.Howshouldtheburdenofmitigatingclimatechangebedividedamongcountries?It
raisesdifficultissuesofjustice,fairness,andrights,allofwhichliewithinthesphereofethics.
Burdensharingisonlyoneoftheethicalquestionsthatclimatechangeraises.
1
Anotheristhe
questionofhowmuchoverallmitigationshouldtakeplace.UNFCCCsetstheaimofavoiding
dangerousanthropogenicinterferencewiththeclimatesystem,andjudgingwhatisdangerousis
partlyataskforethics(seeBox3.1).Besidesjustice,fairness,andrights,acentralconcernofethics
isvalue.Judgementsofvalueunderliethequestionofwhatinterferencewiththeclimatesystem
wouldbedangerous.
Indeed,ethicaljudgementsofvalueunderliealmosteverydecisionthatisconnectedwithclimate
change,includingdecisionsmadebyindividuals,publicandprivateorganizations,governments,and
groupingsofgovernments.Someofthesedecisionsaredeliberatelyaimedatmitigatingclimate
changeoradaptingtoit.Manyothersinfluencetheprogressofclimatechangeoritsimpacts,so
theyneedtotakeclimatechangeintoaccount.
Ethicsmaybebroadlydividedintotwobranches:justiceandvalue.Justiceisconcernedwith
ensuringthatpeoplegetwhatisduetothem.Ifjusticerequiresthatapersonshouldnotbetreated
inaparticularwayuprootedfromherhomebyclimatechange,forexamplethenthepersonhas
arightnottobetreatedthatway.Justiceandrightsarecorrelativeconcepts.Ontheotherhand,
criteriaofvalueareconcernedwithimprovingtheworld:makingitabetterplace.Synonymsfor
valueinthiscontextaregood,goodnessandbenefit.Antonymsarebad,harmandcost.
Toseethedifferencebetweenjusticeandvalue,thinkofatransferofwealthmadebyarichcountry
toapoorone.Thismaybeanactofrestitution.Forexample,itmaybeintendedtocompensatethe
poorcountryforharmthathasbeendonetoitbytherichcountrysemissionsofGHG.Inthiscase,
thetransferismadeongroundsofjustice.Thepaymentistakentobeduetothepoorcountry,and
tosatisfyarightthatthepoorcountryhastocompensation.Alternatively,therichcountrymay
makethetransfertosupportthepoorcountrysmitigationeffort,becausethisisbeneficialto
peopleinthepoorcountry,therichcountry,andelsewhere.Therichcountrymaynotbelievethe
poorcountryhasarighttothesupport,butmakesthepaymentsimplybecauseitdoesgood.This
transferismadeongroundsofvalue.Whatwouldbegoodtodoisnotnecessarilyrequiredasa
matterofjustice.Justiceisconcernedwithwhatpeopleareentitledtoasamatteroftheirrights.
Thedivisionbetweenjusticeandvalueiscontestedwithinmoralphilosophy,andsoisthenatureof
theinteractionbetweenthetwo.Someauthorstreatjusticeasinviolable(Nozick,1974):justicesets
limitsonwhatwemaydoandwemaypromotevalueonlywithinthoselimits.Anoppositeview
calledteleologicalbyRawls(1971)isthattherightdecisiontomakeisalwaysdeterminedbythe
valueofthealternatives,sojusticehasnorole.Butdespitethecomplexityoftheirrelationshipand
thecontroversiesitraises,thedivisionbetweenjusticeandvalueprovidesausefulbasisfor
organizingthediscussionofethicalconceptsandprinciples.Wehaveadopteditinthischapter:
sections3.3and3.4coverjusticeandvalue,respectively.Onetopicappearsinbothsections
becauseitbridgesthedivide:thistopicisdistributivejusticeviewedonewayandthevalueof
equalityviewedtheother.Section3.3.7ongeoengineeringisalsoinanintermediateposition
1
AsurveyoftheethicsofclimatechangeisGardiner(2004),pp.555600.
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becauseitraisesethicalissuesofbothsorts.Section3.6explainshowsomeethicalvaluescanbe
measuredbyeconomicmethodsofvaluation.Section3.5describesthescopeandlimitationsof
thesemethods.Latersectionsdeveloptheconceptsandmethodsofeconomicsinmoredetail.
PracticalwaystotakeaccountofdifferentvaluesinpolicymakingarediscussedinSection3.7.1.
3.3 Justice,equityandresponsibility
Justice,fairness,equity,andresponsibilityareimportantininternationalclimatenegotiations,as
wellasinclimaterelatedpoliticaldecisionmakingwithincountriesandforindividuals.
Inthissectionweexaminedistributivejustice,which,forthepurposeofthisreview,isabout
outcomes,andproceduraljusticeorthewayinwhichoutcomesarebroughtabout.Wealsodiscuss
compensationfordamageandhistoricresponsibilityforharm.Inthecontextofclimatechange,
considerationsofjustice,equity,andresponsibilityconcerntherelationsbetweenindividuals,as
wellasgroupsofindividuals(e.g.,countries),bothatasinglepointintimeandacrosstime.
Accordingly,wedistinguishintragenerationalfromintergenerationaljustice.Theliteraturehasno
agreementonacorrectanswertothequestion,whatisjust?Weindicatewhereopinionsdiffer.
3.3.1 Causalandmoralresponsibility
Fromtheperspectiveofcountriesratherthanindividualsorgroupsofindividuals,historicemissions
canhelpdeterminecausalresponsibilityforclimatechange(denElzenetal.,2005;Lamarqueetal.,
2010;Hhneetal.,2011).Manydevelopedcountriesareexpectedtosufferrelativelymodest
physicaldamageandsomeareevenexpectedtorealizebenefitsfromfutureclimatechange(see
Tol,2002a;b).Ontheotherhand,somedevelopingcountriesbearlesscausalresponsibility,but
couldsuffersignificantphysicaldamagefromclimatechange(IPCC,2007WGIIAR4SPM).This
asymmetrygivesrisetothefollowingquestionsofjusticeandmoralresponsibility:doconsiderations
ofjusticeprovideguidanceindeterminingtheappropriatelevelofpresentandfutureglobal
emissions;thedistributionofemissionsamongthosepresentlyliving;andtheroleofhistorical
emissionsindistributingglobalobligations?Thequestionalsoarisesofwhomightbeconsidered
morallyresponsibleforachievingjustice,and,thus,abearerofdutiestowardsothers.Thequestion
ofmoralresponsibilityisalsokeytodeterminingwhetheranyoneowescompensationforthe
damagecausedbyemissions.
3.3.2 Intergenerationaljusticeandrightsoffuturepeople
Intergenerationaljusticeencompassessomeofthemoraldutiesowedbypresenttofuturepeople
andtherightsthatfuturepeopleholdagainstpresentpeople.
2
Alegitimateacknowledgmentthat
futureorpastgenerationshaverightsrelativetopresentgenerationsisindicativeofabroad
understandingofjustice.
3
Whilejusticeconsiderationssounderstoodarerelevant,theycannot
coverallourconcernsregardingfutureandpastpeople,includingthecontinuedexistenceof
humankindandwithahighlevelofwellbeing.
4
Whatdutiesdopresentgenerationsowefuturegenerationsgiventhatcurrentemissionswillaffect
theirqualityoflife?Somejusticetheoristshaveofferedthefollowingargumenttojustifyacapon
2
Inthephilosophicalliterature,justicebetweengenerationstypicallyreferstotherelationsbetweenpeople
whoselifetimesdonotoverlap(Barry,1977).Incontrast,justicebetweenagegroupsreferstotherelations
ofpeoplewhoselifetimesdooverlap(LaslettandFishkin,1992).SeealsoGardiner(2011),pp.14548.
3
SeeRawls(1971,1999),Barry(1977),SikoraandBarry(1978),Partridge(1981),Parfit(1986),Birnbacher
(1988),andHeyd(1992).
4
SeeBaier(1981),DeShalit(1995),Meyer(2005),andforAfricanphilosophicalperspectivessee,Behrens
(2012).SeeSection3.4onthewellbeingoffuturepeople.
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emissions(Shue,1993,1999;Caney,2006a;MeyerandRoser,2009;Wolf,2009).Iffuturepeoples
basicrightsincludetherighttosurvival,health,andsubsistence,thesebasicrightsarelikelytobe
violatedwhentemperaturesriseaboveacertainlevel.However,currentlylivingpeoplecanslowthe
riseintemperaturebylimitingtheiremissionsatareasonablecosttothemselves.Therefore,living
peopleshouldreducetheiremissionsinordertofulfiltheirminimaldutiesofjusticetofuture
generations.Normativetheoristsdisputethestandardoflivingthatcorrespondstopeoplesbasic
rights(Page,2007;Huseby,2010).Alsoindisputeiswhatlevelofharmimposedonfuturepeopleis
morallyobjectionable.Somearguethatcurrentlylivingpeoplewrongfullyharmfuturepeopleifthey
causethemtohavealowerlevelofwellbeingthantheirown(e.g.,Barry,1999);othersthat
currentlylivingpeopleowefuturepeopleadecentlevelofwellbeing,whichmightbelowerthan
theirown(Wolf,2009).Thisargumentraisesobjectionsongroundsofjusticesinceitpresupposes
thatpresentpeoplecanviolatetherightsoffuturepeople,andthattheprotectionoffuture
peoplesrightsispracticallyrelevantforhowpresentpeopleoughttoact.
Sometheoristsclaimthatfuturepeoplecannotholdrightsagainstpresentpeople,owingtospecial
featuresofintergenerationalrelations:someclaimthatfuturepeoplecannothaverightsbecause
theycannotexercisethemtoday(Steiner,1983;Wellman,1995,ch.4).Otherspointoutthat
interactionbetweennoncontemporariesisimpossible(Barry,1977,pp.243244,1989,p.189).
However,somejusticetheoristsarguethatneithertheabilityto,northepossibilityof,mutual
interactionarenecessaryinattributingrightstopeople(Barry,1989;Buchanan,2004).Theyhold
thatrightsareattributedtobeingswhoseinterestsareimportantenoughtojustifyimposingduties
onothers.
Themainsourceofscepticismabouttherightsoffuturepeopleandthedutiesweowethemisthe
socallednonidentityproblem.Actionswetaketoreduceouremissionswillchangepeoplesway
oflifeandsoaffectnewpeopleborn.Theyaltertheidentitiesoffuturepeople.Consequently,our
emissionsdonotmakefuturepeopleworseoffthantheywouldotherwisehavebeen,sincethose
futurepeoplewouldnotexistifwetookactiontopreventouremissions.Thismakesithardtoclaim
thatouremissionsharmfuturepeople,orthatweoweittothemasamatteroftheirrightsto
reduceouremissions.
5
Itisoftenarguedthatthenonidentityproblemcanbeovercome(McMahan,1998;Shiffrin,1999;
Kumar,2003;Meyer,2003;Harman,2004;Reiman,2007;Shue,2010).Inanycase,dutiesofjustice
donotincludeallthemoralconcernsweshouldhaveforfuturepeople.Otherconcernsarematters
ofvalueratherthanjustice,andtheytoocanbeunderstoodinsuchawaythattheyarenotaffected
bythenonidentityproblem.TheyareconsideredinSection3.4.
Ifpresentpeoplehaveadutytoprotectfuturepeoplesbasicrights,thisdutyiscomplicatedby
uncertainty.Presentpeoplesactionsoromissionsdonotnecessarilyviolatefuturepeoplesrights;
theycreateariskoftheirrightsbeingviolated(Bell,2011).Todeterminewhatcurrentlyliving
peopleowefuturepeople,onehastoweighsuchuncertainconsequencesagainstother
consequencesoftheiractions,includingthecertainorlikelyviolationoftherightsofcurrentlyliving
people(Oberdiek,2012;Temkin,2012).Thisisimportantinassessingmanylongtermpolicies,
includingongeoengineering(seeSection3.3.7),thatriskviolatingtherightsofmanygenerations
ofpeople(Crutzen,2006;Schneider,2008;Victoretal.,2009;Baer,2010;Ott,2012).
3.3.3 Intergenerationaljustice:distributivejustice
Supposethataglobalemissionsceilingthatisintergenerationallyjusthasbeendetermined
(recognizingthataceilingisnottheonlywaytodealwithclimatechange),thequestionthenarises
ofhowtheceilingoughttobedividedamongstates(and,ultimately,theirindividualmembers)
5
ForanoverviewoftheissueseeMeyer(2010).SeealsoSchwartz(1978),Parfit(1986),andHeyd(1992).Fora
differentperspectiveseePerrett(2003).
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(Jamieson,2001;Singer,2002;MeyerandRoser,2006;Caney,2006a).Distributingemissionpermits
isawayofarrivingatagloballyjustdivision.Amongthewidelydiscussedviewsondistributive
justicearestrictegalitarianism(Temkin,1993),indirectegalitarianviewsincludingprioritarianism
(Parfit,1997),andsufficientarianism(Frankfurt,1999).Strictegalitarianismholdsthatequalityhas
valueinitself.Prioritarianismgivesgreaterweighttoapersonswellbeingthelesswelloffsheis,as
describedinSection3.4.Sufficientarianismrecommendsthateveryoneshouldbeabletoenjoya
particularlevelofwellbeing.
Forexample,twooptionscanhelpapplyprioritarianismtothedistributionoffreelyallocatedand
globallytradeableemissionpermits.Thefirstistoignorethedistributionofothergoods.Thenstrict
egalitarianismorprioritarianismwillrequireemissionpermitstobedistributedequally,sincethey
willhaveonepriceandarethusequivalenttoincome.Thesecondistotakeintoaccountthe
unequaldistributionofotherassets.Sincepeopleinthedevelopingworldarelesswelloffthanin
thedevelopedworld,strictegalitarianismorprioritarianismwouldrequiremostorallpermitstogo
tothedevelopingworld.However,itisquestionablewhetheritisappropriatetobringtheoverall
distributionofgoodsclosertotheprioritarianidealthroughthedistributionofjustonegood(Wolff
anddeShalit,2007;Caney,2009,2012).
3.3.4 Historicalresponsibilityanddistributivejustice
Historicalresponsibilityforclimatechangedependsoncountriescontributionstothestockof
GHGs.TheUNFCCCreferstocommonbutdifferentiatedresponsibilitiesamongcountriesofthe
world.
6
Thisissometimestakentoimplythatcurrentandhistoricalcausalresponsibilityforclimate
changeshouldplayaroleindeterminingtheobligationsofdifferentcountriesinreducingemissions
andpayingforadaptationmeasuresglobally(Rajamani,2000;Riveetal.,2006;Friman,2007).
Anumberofobjectionshavebeenraisedagainsttheviewthathistoricalemissionsshouldplayarole
(see,e.g.,Gosseries,2004;Caney,2005;MeyerandRoser,2006;PosnerandWeisbach,2010).First,
ascurrentlylivingpeoplehadnoinfluenceovertheactionsoftheirancestors,theycannotbeheld
responsibleforthem.Second,previouslylivingpeoplemaybeexcusedfromresponsibilityonthe
groundsthattheycouldnotbeexpectedtoknowthattheiremissionswouldhaveharmful
consequences.Thirdly,presentindividualswiththeirparticularidentitiesarenotworseorbetteroff
asaresultoftheemissiongeneratingactivitiesofearliergenerationsbecause,owingtothenon
identityproblem,theywouldnotexistastheindividualstheyarehadearliergenerationsnotacted
astheydid.
Fromtheperspectiveofdistributivejustice,however,theseobjectionsneednotpreventpast
emissionsandtheirconsequencesbeingtakenintoaccount(MeyerandRoser,2010;Meyer,2013).
Ifweareonlyconcernedwiththedistributionofbenefitsfromemissiongeneratingactivitiesduring
anindividualslifespan,weshouldincludethebenefitspresentpeoplehavereceivedfromtheirown
emissiongeneratingactivities.Furthermore,presentpeoplehavebenefitedsincebirthor
conceptionfrompastpeoplesemissionproducingactions.Theyarethereforebetteroffasaresult
ofpastemissions,andanyprincipleofdistributivejusticeshouldtakethatintoaccount.Some
suggestthattakingaccountoftheconsequencesofsomepastemissionsinthiswayshouldnotbe
subjecttotheobjectionsmentionedinthepreviousparagraph(seeShue,2010).Otherconcepts
associatedwithhistoricalresponsibilityarediscussedinChapter4.
6
Specifically,Article3oftheUNFCCCincludesthesentence:ThePartiesshouldprotecttheclimatesystemfor
thebenefitofpresentandfuturegenerationsofhumankind,onthebasisofequityandinaccordancewith
theircommonbutdifferentiatedresponsibilitiesandrespectivecapabilities.
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3.3.5 Intragenerationaljustice:compensatoryjusticeandhistoricalresponsibility
Dothosewhosufferdisproportionatelyfromtheconsequencesofclimatechangehavejustclaimsto
compensationagainstthemainperpetratorsorbeneficiariesofclimatechange(see,e.g.,Neumayer,
2000;Gosseries,2004;Caney,2006b)?
Onewayofdistinguishingcompensatoryfromdistributiveclaimsistorelyontheideaofajust
baselinedistributionthatisdeterminedbyacriterionofdistributivejustice.Underthisapproach,
compensationforclimatedamageandadaptationcostsisowedonlybypeoplewhohaveacted
wrongfullyaccordingtonormativetheory(Feinberg,1984;Coleman,1992;McKinnon,2011).Other
deviationsfromthebaselinemaywarrantredistributivemeasurestoredressundeservedbenefitsor
harms,butnotascompensation.Somedeviations,suchasthosethatresultfromfreechoice,may
notcallforanyredistributionatall.
Thedutytomakecompensatorypayments(Gosseries,2004;Caney,2006b)mayfallonthosewho
emitorbenefitfromwrongfulemissionsorwhobelongtoacommunitythatproducedsuch
emissions.Accordingly,threeprinciplesofcompensatoryjusticehavebeensuggested:thepolluter
paysprinciple(PPP),thebeneficiarypaysprinciple(BPP),andthecommunitypaysprinciple(CPP)
(MeyerandRoser,2010;Meyer,2013).Noneofthethreemeasuresisgenerallyaccepted,though
thePPPismorewidelyacceptedthantheothers.ThePPPrequirestheemittertopaycompensation
iftheagentemittedmorethanitsfairshare(determinedasoutlinedinSection3.3.2)anditeither
knew,orcouldreasonablybeexpectedtoknow,thatitsemissionswereharmful.Thevictimshould
beabletoshowthattheemissionseithermadethevictimworseoffthanbeforeorpushedbelowa
specifiedthresholdofharm,orboth.
TherighttocompensatorypaymentsforwrongfulemissionsunderPPPhasatleastthreebasic
limitations.TwohavealreadybeenmentionedinSection3.3.4.Emissionsthattookplacewhileit
waspermissibletobeignorantofclimatechange(whenpeopleneitherdidknownorcouldbe
reasonablybeexpectedtoknowabouttheharmfulconsequencesofemissions)maybeexcused
(Gosseries,2004,pp.3941).SeealsoSection3.3.6.Thenonidentityproblem(seeSection3.3.2)
impliesthatearlieremissionsdonotharmmanyofthepeoplewhocomeintoexistencelater.
Potentialdutybearersmaybedeadandcannotthereforehaveadutytosupplycompensatory
measures.ItmaythereforebedifficulttousePPPinascribingcompensatorydutiesandidentifying
wrongedpersons.Thefirstandthirdlimitationsrestricttheassignmentofdutiesofcompensationto
currentlylivingpeoplefortheirmostrecentemissions,eventhoughmanymorepeoplearecausally
responsiblefortheharmfuleffectsofclimatechange.Forfutureemissions,thethirdlimitationcould
beovercomethroughaclimatechangecompensationfundintowhichagentspayleviesforimposing
theriskofharmonfuturepeople(McKinnon,2011).
AccordingtoBPP,apersonwhoiswrongfullybetteroffrelativetoajustbaselineisrequiredto
compensatethosewhoareworseoff.Pastemissionsbenefitsomeandimposecostsonothers.If
currentlylivingpeopleacceptthebenefitsofwrongfulpastemissions,ithasbeenarguedthatthey
takeonsomeofthepastwrongdoersdutyofcompensation(Gosseries,2004).Also,wehaveaduty
tocondemninjustice,whichmayentailadutynottobenefitfromaninjusticethatcausesharmto
others(Butt,2007).However,BPPisopentoatleasttwoobjections.First,dutiesofcompensation
ariseonlyfrompastemissionsthathavebenefitedpresentpeople;nocompensationisowedfor
otherpastemissions.Second,ifvoluntaryacceptanceofbenefitsisaconditionoftheirgivingriseto
compensatoryduties,thebearersofthedutiesmustbeabletoforgothebenefitsinquestionata
reasonablecost.
UnderCPP,moraldutiescanbeattributedtopeopleasmembersofgroupswhoseidentitypersists
overgenerations(DeShalit,1995;Thompson,2009).Theprincipleclaimsthatmembersofa
community,includingacountry,canhavecollectiveresponsibilityforthewrongfulactionsofother
pastandpresentmembersofthecommunity,eventhoughtheyarenotmorallyorcausally
responsibleforthoseactions(Thompson,2001;Miller,2004;Meyer,2005).Itisamatterofdebate
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underwhatconditionspresentpeoplecanbesaidtohaveinheritedcompensatoryduties.Although
CPPpurportstoovercometheproblemthatapollutermightbedead,itcanjustifycompensatory
measuresonlyforemissionsthataremadewrongfully.Itdoesnotcoveremissionscausedbyagents
whowerepermissiblyignorantoftheirharmfulness.(Theagentinthiscasemaybethecommunity
orstate).
Thepracticalrelevanceofprinciplesofcompensatoryjusticeislimited.Insofarastheharmsand
benefitsofclimatechangeareundeserved,distributivejusticewillrequirethemtobeevenedout,
independentlyofcompensatoryjustice.Dutiesofdistributivejusticedonotpresupposeany
wrongdoing(seeSection3.3.4).Forexample,ithasbeensuggestedongroundsofdistributive
justicethatthedutytopayforadaptationshouldbeallocatedonthebasisofpeoplesabilitytopay,
whichpartlyreflectsthebenefittheyhavereceivedfrompastemissions(Jamieson,1997;Shue,
1999;Caney,2010;Gardiner,2011).However,presentpeopleandgovernmentscanbesaidtoknow
aboutboththeseriouslyharmfulconsequencesoftheiremissiongeneratingactivitiesforfuture
peopleandeffectivemeasurestopreventthoseconsequences.Ifsoandiftheycanimplementthese
measuresatareasonablecosttothemselvestoprotectfuturepeoplesbasicrights(see,e.g.,
Birnbacher,2009;Gardiner,2011),theymightbeviewedasowingintergenerationaldutiesofjustice
tofuturepeople(seeSection3.3.2).
3.3.6 Legalconceptsofhistoricalresponsibility
Legalsystemshavestruggledtodefinetheboundariesofresponsibilityforharmfulactionsandare
onlynowbeginningtodosoforclimatechange.Itremainsunclearwhethernationalcourtswill
acceptlawsuitsagainstGHGemitters,andlegalscholarsvigorouslydebatewhetherliabilityexists
undercurrentlaw(Mank,2007;BurnsandOsofsky,2009;FaureandPeeters,2011;Haritz,2011;
Kosolapova,2011;Kysar,2011;GerrardandWannier,2012).Thissectionisconcernedwithmoral
responsibility,whichisnotthesameaslegalresponsibility.Butmoralthinkingcandrawuseful
lessonsfromlegalideas.
Harmfulconductisgenerallyabasisforliabilityonlyifitbreachessomelegalnorm(Tunc,1983),
suchasnegligence,orifitinterferesunreasonablywiththerightsofeitherthepublicorproperty
owners(Mank,2007;Grossman,2009;Kysar,2011;Bruneetal.,2012;GoldbergandLord,2012;
Kochetal.,2012).Liabilityfornuisancedoesnotexistiftheagentdidnotknow,orhavereasonto
know,theeffectsofitsconduct(AntoliniandRechtschaffen,2008).Thelawinconnectionwith
liabilityforenvironmentaldamagestillhastobesettled.TheEuropeanUnion,butnottheUnited
States,recognizesexemptionfromliabilityforlackofscientificknowledge(UnitedStatesCongress,
1980;EuropeanUnion,2004).UnderEuropeanlaw,andinsomeUSstates,defendantsarenot
responsibleifaproductdefecthadnotyetbeendiscovered(EuropeanCommission,1985;Dana,
2009).SomelegalscholarssuggestthatassigningblameforGHGemissionsdatesbackto1990when
theharmfulnessofsuchemissionswasestablishedinternationally,butothersargueinfavourofan
earlierdate(FaureandNollkaemper,2007;HunterandSalzman,2007;Haritz,2011).Legalsystems
alsorequireacausallinkbetweenadefendantsconductandsomeidentifiedharmtotheplaintiff,
inthiscasefromclimatechange(Tunc,1983;FaureandNollkaemper,2007;Kosolapova,2011;
Kysar,2011;Bruneetal.,2012;EwingandKysar,2012;GoldbergandLord,2012).Acausallink
mightbeeasiertoestablishbetweenemissionsandadaptationcosts(Farber,2007).Legalsystems
generallyalsorequirecausalforeseeabilityordirectness(Mank,2007;Kosolapova,2011;vanDijk,
2011;EwingandKysar,2012),althoughsomestatutesrelaxthisrequirementinspecificcases(such
astheUSComprehensiveEnvironmentalResponse,Compensation,andLiabilityAct(CERCLA),
commonlyknownasSuperfund.EmittersmightarguethattheircontributiontoGHGlevelswastoo
smallandtheharmfuleffectstooindirectanddiffusetosatisfythelegalrequirements(Sinnot
Armstrong,2010;FaureandPeeters,2011;Hiller,2011;Kysar,2011;vanDijk,2011;Gerrardand
Wannier,2012).
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Climatechangeclaimscouldalsobeclassifiedasunjustenrichment(Kull,1995;Birks,2005),but
legalsystemsdonotremedyallformsofenrichmentthatmightberegardedasethicallyunjust
(Zimmermann,1995;AmericanLawInstitute,2011;Laycock,2012).Undersomelegalsystems,
liabilitydependsonwhetherbenefitswereconferredwithoutlegalobligationorthrougha
transactionwithnoclearchangeofownership(Zimmermann,1995;AmericanLawInstitute,2011;
Laycock,2012).Itisnotclearthattheseprinciplesapplytoclimatechange.
Asindicated,legalsystemsdonotrecognizeliabilityjustbecauseapositiveornegativeexternality
exists.Theirresponsedependsonthebehaviourthatcausedtheexternalityandthenatureofthe
causallinkbetweentheagentsbehaviourandtheresultinggainorlosstoanother.
3.3.7 Geoengineering,ethics,andjustice
Geoengineering(alsoknownasclimateengineering[CE]),islargescaletechnicalinterventioninthe
climatesystemthataimstocancelsomeoftheeffectsofGHGemissions(formoredetailsseeWGI
6.5andWGIII6.9).Geoengineeringrepresentsathirdkindofresponsetoclimatechange,besides
mitigationandadaptation.Variousoptionsforgeoengineeringhavebeenproposed,including
differenttypesofsolarradiationmanagement(SRM)andcarbondioxideremoval(CDR).Thissection
reviewsthemajormoralargumentsforandagainstgeoengineeringtechnologies(forsurveyssee
Robock,2008;CornerandPidgeon,2010;Gardiner,2010;Ott,2010;BetzandCacean,2012;
Preston,2013).Thesemoralargumentsdonotapplyequallytoallproposedgeoengineering
methodsandhavetobeassessedonacasespecificbasis.
7
Threelinesofargumentsupporttheviewthatgeoengineeringtechnologiesmightbedesirableto
deployatsomepointinthefuture.First,thathumanitycouldendupinasituationwheredeploying
geoengineering,particularlySRM,appearsasalesserevilthanunmitigatedclimatechange(Crutzen,
2006;Gardiner,2010;Keithetal.,2010;Svoboda,2012a;Betz,2012).Second,thatgeoengineering
couldbeamorecosteffectiveresponsetoclimatechangethanmitigationoradaptation(Barrett,
2008).Suchefficiencyargumentshavebeencriticizedintheethicalliteratureforneglectingissues
suchassideeffects,uncertainties,orfairness(Gardiner,2010,2011;Buck,2012).Third,thatsome
aggressiveclimatestabilizationtargetscannotbeachievedthroughmitigationmeasuresaloneand
thusmustbecomplementedbyeitherCDRorSRM(Greeneetal.,2010;Sandler,2012).
Geoengineeringtechnologiesfaceseveraldistinctsetsofobjections.Someauthorshavestressedthe
substantialuncertaintiesoflargescaledeployment(foroverviewsofgeoengineeringrisksseealso
Schneider(2008)andSardemannandGrunwald(2010)),whileothershavearguedthatsome
intendedandunintendedeffectsofbothCDRandSRMcouldbeirreversible(Jamieson,1996)and
thatsomecurrentuncertaintiesareunresolvable(Bunzl,2009).Furthermore,ithasbeenpointed
outthatgeoengineeringcouldmakethesituationworseratherthanbetter(HegerlandSolomon,
2009;Fleming,2010;Hamilton,2013)andthatseveraltechnologieslackaviableexitoption:SRMin
particularwouldhavetobemaintainedaslongasGHGconcentrationsremainelevated(TheRoyal
Society,2009).
Argumentsagainstgeoengineeringonthebasisoffairnessandjusticedealwiththeintra
generationalandintergenerationaldistributionaleffects.SRMschemescouldaggravatesome
inequalitiesif,asexpected,theymodifyregionalprecipitationandtemperaturepatternswith
unequalsocialimpacts(Bunzl,2008;TheRoyalSociety,2009;Svobodaetal.,2011;Preston,2012).
Furthermore,someCDRmethodswouldrequirelargescalelandtransformations,potentially
7
Whiletheliteraturetypicallyassociatessomeargumentswithparticulartypesofmethods(e.g.,the
terminationproblemwithSRM),itisnotclearthattherearetwogroupsofmoralarguments:thoseapplicable
toallSRMmethodsontheonesideandthoseapplicabletoallCDRmethodsontheotherside.Inotherwords,
themoralassessmenthingesonaspectsofgeoengineeringthatarenotconnectedtothedistinctionbetween
SRMandCDR.
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competingwithagriculturallanduse,withuncertaindistributiveconsequences.Otherarguments
againstgeoengineeringdealwithissuesincludingthegeopoliticsofSRM,suchasinternational
conflictsthatmayarisefromtheabilitytocontroltheglobalthermostat(e.g.,Schelling,1996;
Hulme,2009),ethics(HaleandGrundy,2009;Preston,2011;HaleandDilling,2011;Svoboda,2012b;
Hale,2012b),andacriticalassessmentoftechnologyandmoderncivilizationingeneral(Fleming,
2010;Scott,2012).
Oneofthemostprominentargumentsagainstgeoengineeringsuggeststhatgeoengineering
researchactivitiesmighthampermitigationefforts(e.g.,Jamieson,1996;Keith,2000;Gardiner,
2010),whichpresumesthatgeoengineeringshouldnotbeconsideredanacceptablesubstitutefor
mitigation.Thecentralideaisthatresearchincreasestheprospectofgeoengineeringbeing
regardedasaseriousalternativetoemissionreduction(foradiscussionofdifferentversionsofthis
argumentseeHale,2012a;Hourdequin,2012).Otherauthorshaveargued,basedonhistorical
evidenceandanalogiestoothertechnologies,thatgeoengineeringresearchmightmakedeployment
inevitable(Jamieson,1996;Bunzl,2009),orthatlargescalefieldtestscouldamounttofullfledged
deployment(Robocketal.,2010).Ithasalsobeenarguedthatgeoengineeringwouldconstitutean
unjustimpositionofrisksonfuturegenerations,becausetheunderlyingproblemwouldnotbe
solvedbutonlycounteractedwithriskytechnologies(Gardiner,2010;Ott,2012;Smith,2012).The
latterargumentisparticularlyrelevanttoSRMtechnologiesthatwouldnotaffectgreenhousegas
concentrations,butitwouldalsoapplytosomeCDRmethods,astheremaybeissuesoflongterm
safetyandcapacityofstorage.
Argumentsinfavourofresearchongeoengineeringpointoutthatresearchdoesnotnecessarily
prepareforfuturedeployment,butcan,onthecontrary,uncovermajorflawsinproposedschemes,
avoidprematureCEdeployment,andeventuallyfostermitigationefforts(e.g.,Keithetal.,2010).
AnotherjustificationforResearchandDevelopment(R&D)isthatitisrequiredtohelpdecision
makerstakeinformeddecisions(LeisnerandMllerKlieser,2010).
3.4 Valuesandwellbeing
Onebranchofethicsisthetheoryofvalue.Manydifferentsortsofvaluecanarise,andclimate
changeimpingesonmanyofthem.Valueaffectsnatureandmanyaspectsofhumanlife.This
sectionsurveyssomeofthevaluesatstakeinclimatechange,andexamineshowfarthesevalues
canbemeasured,combined,orweighedagainsteachother.Eachvalueissubjecttodebateand
disagreement.Forexample,itisdebatablewhethernaturehasvalueinitsownright,apartfromthe
benefititbringstohumanbeings.Decisionmakingaboutclimatechangeisthereforelikelytobe
contentious.
Sincevaluesconstituteonlyonepartofethics,ifanactionwillincreasevalueoverallitbynomeans
followsthatitshouldbedone.Manyactionsbenefitsomepeopleatthecostofharmingothers.This
raisesaquestionofjusticeevenifthebenefitsintotalexceedthecosts.Whereasacosttoaperson
canbecompensatedforbyabenefittothatsameperson,acosttoapersoncannotbe
compensatedforbyabenefittosomeoneelse.Tosupposeitcanisnottotakeseriouslythe
distinctionbetweenpersons,asJohnRawlsputsit(1971,p.27).Harmingapersonmayinfringe
theirrights,oritmaybeunfairtothem.Forexample,whenanationseconomicactivitiesemitGHG,
theymaybenefitthenationitself,butmayharmpeopleinothernations.Evenifthebenefitsare
greaterinvaluethantheharms,theseactivitiesmayinfringeothernationsrights.Othernations
maythereforebeentitledtoobjecttothemongroundsofjustice.
Anydecisionaboutclimatechangeislikelytopromotesomevaluesanddamageothers.Thesemay
bevaluesofverydifferentsorts.Indecisionmaking,differentvaluesmustthereforebeputtogether
orbalancedagainsteachother.Somepairsofvaluesdiffersoradicallyfromeachotherthatthey
cannotbedeterminatelyweighedtogether.Forexample,itmaybeimpossibletoweighthevalueof
preservingatraditionalcultureagainstthematerialincomeofthepeoplewhosecultureitis,orto
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weighthevalueofbiodiversityagainsthumanwellbeing.Someeconomistsclaimthatonepersons
wellbeingcannotbeweighedagainstanothers(Robbins,1937;Arrow,1963).Whenvaluescannot
bedeterminatelyweighed,theyaresaidtobeincommensurableorincomparable(Chang,1997).
MultiCriteriaAnalysis(MCA)(discussedinSection3.7.2.1)isatechniquethatisdesignedtotake
accountofseveralincommensurablevalues(DeMontisetal.,2005;ZelenyandCochrane,1982).
3.4.1 Nonhumanvalues
Natureprovidesgreatbenefitstohumanbeingsinwaysthatrangefromabsorbingourwaste,to
beautifyingtheworldweinhabit.Anincreasingnumberofphilosophershavearguedinrecentyears
thatnaturealsohasvalueinitsownright,independentlyofitsbenefitstohumanbeings(Leopold,
1949;Palmer,2011).Theyhavearguedthatweshouldrecognizeanimalvalues,thevalueoflife
itself,andeventhevalueofnaturalsystemsandnatureitself.
Inmoraltheory,rationaladulthumans,whoareselfconscioussubjectsofalife,areoftentaken
(followingKant,1956)tohaveakindofunconditionalmoralworthsometimescalleddignity
thatisnotfoundelsewhereonearth.Othersbelievethatmoralworthcanbefoundelsewhere
(Dryzek,1997).Manyhumanbeingsthemselveslackrationalityorsubjectivity,yetstillhavemoral
worththeveryyoung,theveryoldandpeoplewithvariouskindsofimpairmentamongthem.
Giventhat,whydenymoralworthtothoseanimalsthataretosomeextentsubjectsofalife,who
showemotionalsophistication(Regan,2004),andwhoexperiencepleasure,pain,suffering,andjoy
(Singer,1993)?
AnargumentforrecognizingvalueinplantsaswellasanimalswasproposedbyRichardRoutley
(1973).Routleygivesthenamehumanchauvinismtotheviewthathumansarethesolepossessors
ofintrinsicvalue.Heasksustoimaginethatthelastmanonearthsetsouttodestroyeveryliving
thing,animalorplant.Mostpeoplebelievethiswouldbewrong,buthumanchauvinistsareunable
toexplainwhy.Humanchauvinismappearstobesimplyaprejudiceinfavourofthehumanspecies
(RoutleyandRoutley,1980).Incontrast,somephilosophersarguethatvalueexistsinthelivesofall
organisms,totheextentthattheyhavethecapacitytoflourish(Taylor,1986;Agar,2001).
Goingfurther,otherphilosophershavearguedthatbiologicalcommunitiesandholisticecological
entitiesalsohavevalueintheirownright.Somehavearguedthataspecieshasmorevaluethanall
ofitsindividualshavetogether,andthatanecosystemhasstillmorevalue(Rolston,1988,1999;
comparediscussioninBrennanandLo,2010).Ithasfurtherbeenproposedthat,justasdomination
ofonehumangroupbyanotherisamoralevil,showingdisrespectforthevalueofothers,thensois
thedominationofnaturebyhumansingeneral.Ifnatureanditssystemshavemoralworth,thenthe
dominationofnatureisalsoakindofdisrespect(Jamieson,2010).
Ifanimals,plants,species,andecosystemsdohavevalueintheirownright,thenthemoralimpactof
climatechangecannotbegaugedbyitseffectsonhumanbeingsalone.Ifclimatechangeleadsto
thelossofenvironmentaldiversity,theextinctionofplantandanimalspecies,andthesufferingof
animalpopulations,thenitwillcausegreatharmsbeyondthoseitdoestohumanbeings.Itseffects
onspeciesnumbers,biodiversity,andecosystemsmaypersistforaverylongtime,perhapseven
longerthanthelifetimeofthehumanspecies(Nolt,2011).
Itisverydifficulttomeasurenonhumanvaluesinawaythatmakesthemcommensuratewith
humanvalues.Economistsaddressthisissuebydividingvalueintousevalue(associatedwithactual
useofnatureinstrumentalvalue)andnonuseorexistencevalue(intrinsicvalueofnature).Asan
example,biodiversitymighthavevaluebecauseofthemedicaldrugsthatmightbediscovered
amongthediversebiota(usevalue).Orbiodiversitymightbevaluedbyindividualssimplybecause
theybelievethatbiologicdiversityisimportant,overandaboveanyusetopeoplethatmightoccur.
Thetotalamountpeoplearewillingtopayhassometimesbeenusedasaneconomicmeasureofthe
totalvalue(instrumentalandintrinsic)ofthesefeatures(Aldred,1994).Asthediscussionofthepast
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fewparagraphshassuggested,naturemayhaveadditionalvalue,overandabovethevaluesplaced
byindividualhumans(Broome,2009;Spashetal.,2009).
3.4.2 Culturalandsocialvalues
ThevalueofhumanwellbeingisconsideredinSection3.4.3,butthehumanworldmayalso
possessothervaluesthatdonotformpartofthewellbeingofindividualhumans.Livingina
flourishingcultureandsocietycontributestoapersonswellbeing(Kymlicka,1995;Appiah,2010),
butsomeauthorsclaimthatculturesandsocietiesalsopossessvaluesintheirownright,overand
abovethecontributiontheymaketowellbeing(Taylor,1995).Climatechangethreatensdamageto
culturalartefactsandtoculturesthemselves(Adgeretal.,2012).Evidencesuggeststhatitmay
alreadybedamagingthecultureofArcticindigenouspeoples(Fordetal.,2006,2008;Crate,2008;
Hassol,2004;seealsoWGIIChapter12).Culturalvaluesandindigenouspeoplesarediscussedin
Section3.10.2.
Thedegreeofequalityinasocietymayalsobetreatedasavaluethatbelongstoasocietyasa
whole,ratherthantoanyoftheindividualswhomakeupthesociety.Variousmeasuresofthisvalue
areavailable,includingtheGinicoefficientandtheAtkinsonmeasure(Gini,1912;Atkinson,1970);
foranassessmentsee(Sen,1973).Section3.5explainsthatthevalueofequalitycanalternatively
betreatedasafeatureoftheaggregationofindividualpeopleswellbeings,ratherthanassocial
valueseparatefromwellbeing.
3.4.3 Wellbeing
Mostpolicyconcernedwithclimatechangeaimsultimatelyatmakingtheworldbetterforpeopleto
livein.Thatistosay,itaimstopromotepeopleswellbeing.Apersonswellbeing,asthetermis
usedhere,includeseverythingthatisgoodorbadforthepersoneverythingthatcontributesto
makingtheirlifegowellorbadly.Whatthingsarethosewhatconstitutesapersonswellbeing?
Thisquestionhasbeenthesubjectofanextensiveliteraturesinceancienttimes.
8
Oneviewisthata
personswellbeingisthesatisfactionoftheirpreferences.Anotheristhatitconsistsingoodfeelings
suchaspleasure.Athirdisthatwellbeingconsistsinpossessingtheordinarygoodthingsoflife,such
ashealth,wealth,alonglife,andparticipatingwellinagoodcommunity.Thecapabilitiesapproach
ineconomics(Sen,1999)embodiesthislastview.Ittreatsthegoodthingsoflifeasfunctionings
andcapabilitiesthingsthatapersondoesandthingsthattheyhavearealopportunityofdoing,
suchaslivingtooldage,havingagoodjob,andhavingfreedomofchoice.
Apersonswellbeingwillbeaffectedbymanyoftheothervaluesthatarementionedabove,andby
manyoftheconsiderationsofjusticementionedinSection3.3.Itisbadforapersontohavetheir
rightsinfringedortobetreatedunfairly,anditisgoodforapersontolivewithinahealthyculture
andsociety,surroundedbyflourishingnature.
Variousconcretemeasuresofwellbeingareinuse(Fleurbaey,2009;Stiglitzetal.,2009).Each
reflectsaparticularviewaboutwhatwellbeingconsistsin.Forexample,manymeasuresof
subjectivewellbeing(OswaldandWu,2010;KahnemanandDeaton,2010)assumethatwellbeing
consistsingoodfeelings.Monetarymeasuresofwellbeing,whichareconsideredinSection3.6,
assumethatwellbeingconsistsinthesatisfactionofpreferences.Othermeasuresassumewellbeing
consistsinpossessinganumberofspecificgoodthings.TheHumanDevelopmentIndex(HDI)is
intendedtobeanapproximatemeasureofwellbeingunderstoodascapabilitiesandfunctionings
(UNDP,2010).Itisbasedonthreecomponents:lifeexpectancy,education,andincome.The
capabilitiesapproachhasinspiredothermeasuresofwellbeingtoo(DervisandKlugman,2011).In
thecontextofclimatechange,manydifferentmetricsofvalueareintendedtomeasureparticular
8
Forexample:Aristotle,NicomacheanEthics.Recentworkincludes:Griffin(1986);Sumner(1999);Kraut
(2007).
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componentsofwellbeing:amongthemarethenumbersofpeopleatriskfromhunger,infectious
diseases,coastalflooding,orwaterscarcity.Thesemetricsmaybecombinedtocreateamore
generalmeasure.Schneideretal.(2000)advocatestheuseofasuiteoffivemetrics:(1)monetary
loss,(2)lossoflife,(3)qualityoflife(takingaccountofforcedmigration,conflictoverresources,
culturaldiversity,andlossofculturalheritagesites),(4)speciesorbiodiversityloss,and(5)
distributionandequity.
3.4.4 Aggregationofwellbeing
Whateverwellbeingconsistsof,policymakingmusttakeintoaccountthewellbeingofeveryonein
thesociety.Sothewellbeingsofdifferentpeoplehavesomehowtobeaggregatedtogether.Howdo
theycombinetomakeupanaggregatevalueofwellbeingforasocietyasawhole?Socialchoice
theorytakesupthisproblem(Arrow,1963;Sen,1970).Section3.6willexplainthattheaimof
economicvaluationistomeasureaggregatewellbeing.
Assumethateachpersonhasalevelofwellbeingateachtimetheyarealive,andcallthistheir
temporalwellbeingatthattime.Inasociety,temporalwellbeingisdistributedacrosstimesand
acrossthepeople.Whenachoiceistobemade,eachoftheoptionsleadstoaparticulardistribution
ofwellbeing.Ouraimistoassessthevalueofsuchdistributions.Doingsoinvolvesaggregating
wellbeingsacrosstimesandacrosspeople,toarriveatanoverall,socialvalueforthedistribution.
3.4.5 Lifetimewellbeing
Nextletusassumethateachpersonstemporalwellbeingscanbeaggregatedtodeterminea
lifetimewellbeingfortheperson,andthatthesocialvalueofthedistributionofwellbeingdepends
onlyontheselifetimewellbeings.Thisistheassumptionthateachpersonswellbeingisseparable,
touseatechnicalterm.Itallowsustosplitaggregationintotwosteps.First,weaggregateeach
personstemporalwellbeingsacrossthetimesintheirlifeinordertodeterminetheirlifetime
wellbeing.Thesecondstepinthenextsectionistoaggregateacrossindividualsusingasocial
welfarefunction.
Ononeaccount,apersonslifetimewellbeingissimplythetotaloftheirtemporalwellbeingsateach
timetheyarealive.Ifapersonswellbeingdependedonlyonthestateoftheirhealth,thisformula
wouldbeequivalenttoqalysordalys(qualityadjustedlifeyearsordisabilityadjustedlifeyears),
whicharecommonlyusedintheanalysisofpublichealth(Murray,1994;Sassi,2006).These
measurestakeapersonslifetimewellbeingtobethetotalnumberofyearstheylive,adjustedfor
theirhealthineachyear.Sincewellbeingactuallydependsonotherthingsaswellashealth,qalysor
dalysprovideatbestanapproximatemeasureoflifetimewellbeing.Iftheyareaggregatedacross
peoplebysimpleaddition,itassumesimplicitlythatayearofhealthylifeisequallyasvaluableto
onepersonasitistoanother.Thatmaybeanacceptableapproximationforthebroadevaluationof
climatechangeimpactsandpolicies,especiallyforevaluatingtheireffectsonhealth(Nordetal.,
1999;Mathersetal.,2009;butalsoseeCurrieetal.,2008).
Otheraccountsgiveeitherincreasing,(Velleman,1991)oralternativelydecreasing,(Kaplowetal.,
2010)weighttowellbeingthatcomesinlateryearsoflife,indeterminingapersonslifetime
wellbeing.
3.4.6 Socialwelfarefunctions
Oncewehavealifetimewellbeingforeachperson,thenextstepistoaggregatetheselifetime
wellbeingsacrosspeople,todetermineanoverallvalueforsociety.Thisinvolvescomparingone
personswellbeingwithanothers.Manyeconomistshaveclaimedthatinterpersonalcomparisonsof
wellbeingareimpossible.
9
Iftheyareright,thewellbeingsofdifferentpeopleareincommensurable
9
Examplesare:Robbins(1937),Archibald(1959),Arrow(1963).Asurveyanddiscussionofthisscepticalview
appearsinHammond(1993).
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andcannotbeaggregated.Inthissectionwesetthisviewaside,andassumethattemporal
wellbeingsaremeasuredinawaythatiscomparableacrosspeople.
10
Thisallowsustoaggregate
differentpeopleslifetimewellbeingsthroughasocialwelfarefunction(SWF)toarriveatanoverall
valueorsocialwelfare.
11
WeshallfirstconsiderSWFsunderthesimplifyingbutunrealisticassumptionthatthedecisionsthat
aretobemadedonotaffecthowmanypeopleexistorwhichpeopleexist:alltheoptionscontain
thesamepeople.AtheoremofHarsanyis(1955)givessomegroundsforthinkingthat,giventhis
assumption,theSWFisadditivelyseparablebetweenpeople.Thismeansithastheform:
Equation3.4.1. V=v
1
(w
1
)+v
2
(w
2
)++v
J
(w
J
).
Herew
i
ispersonislifetimewellbeing.Thisformulasaysthateachpersonswellbeingcanbe
assignedavaluev
i
(w
i
),andallthesevaluesoneforeachpersonareaddeduptodeterminethe
socialvalueofthedistribution.
TheproofofHarsanyisTheoremdependsonassumptionsthatcanbechallenged(Diamond,1967;
Broome,2004;Fleurbaey,2010).So,althoughtheadditivelyseparableformshowninEquation3.4.1
iscommonlyassumedineconomicvaluations,itisnotentirelysecure.Inparticular,thisformmakes
itimpossibletogiveanyvaluetoequalityexceptindirectlythroughprioritarianism,whichwas
introducedinSection3.3.2andisdefinedbelow.Thevalueofinequalitycannotbemeasuredby
theGinicoefficient,forexample,sincethismeasureisnotadditivelyseparable(Sen,1973).
Itisoftenassumedthatthefunctionsv
i
()allhavethesameform,whichmeansthateachpersons
wellbeingisvaluedinthesameway:
Equation3.4.2. V=v(w
1
)+v(w
2
)++v(w
J
)
Alternatively,thewellbeingofpeoplewholivelaterissometimesdiscountedrelativetothe
wellbeingofpeoplewholiveearlier;thisimpliesthatthefunctionalformofv
i
()variesaccordingto
thedatewhenpeoplelive.Discountingoflaterwellbeingisoftencalledpurediscounting.Itis
discussedinSection3.6.2.
EvenifweacceptEquation3.4.2,differentethicaltheoriesimplydifferentSWFs.Utilitarianism
valuesonlythetotalofpeopleswellbeing.TheSWFmaybewritten:
Equation3.4.3. V=w
1
+w
2
++w
J
Utilitarianismgivesnovaluetoequalityinthedistributionofwellbeing:agiventotalofwellbeing
hasthesamevaluehoweverunequallyitisdistributedamongpeople.
ButtheideaofdistributivejusticementionedinSection3.3.3suggeststhatequalityofwellbeing
doeshavevalue.Equation3.4.2willgivevaluetoequalityifthefunctionv()isstrictlyconcave.This
meansthegraphofv()curvesdownwards,asFigure3.1illustrates.(Section3.6.1.1explainsthata
personswellbeingw
i
iscommonlyassumedtobeastrictlyconcavefunctionofherconsumption,
butthisisadifferentpoint.)Theresultingethicaltheoryiscalledprioritarianism.AsFigure3.1
shows,accordingtoprioritarianism,improvingapersonswellbeingcontributesmoretosocial
welfareifthepersonisbadlyoffthaniftheyarewelloff.Theprioritariansloganisprioritytothe
worseoff.Prioritarianismindirectlygivesvaluetoequality:itimpliesthatagiventotalofwellbeing
ismorevaluablethemoreequallyitisdistributed(Sen,1973;Weirich,1983;Parfit,1997).In
10
Potentialbasesofinterpersonalcomparisonsareexaminedin:FleurbaeyandHammond(2004);Sen(1982);
ElsterandRoemer(1993);Mirrlees(1982);Broome,(2004);Arrow(1977);Harsanyi(1977);Adler(2011).
11
ArecentmajorstudyisAdler(2011).
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judgementsaboutclimatechange,aprioritarianfunctionwillgiverelativelymoreimportancetothe
interestsofpoorerpeopleandpoorercountries.
Figure 3.1. The prioritarian view of social welfare. The figure compares the social values of increases
in wellbeing for a better-off and a worse-off person.
3.4.7 Valuingpopulation
Thenextprobleminaggregatingwellbeingistotakeaccountofchangesinpopulation.Climate
changecanbeexpectedtoaffecttheworldshumanpopulation.Severeclimatechangemighteven
leadtoacatastrophiccollapseofthepopulation(Weitzman,2009),andeventotheextinctionof
humanbeings.Anyvaluationoftheimpactofclimatechangeandofpoliciestomitigateclimate
changeshouldthereforetakechangesinpopulationintoaccount.
TheutilitarianandprioritarianSWFsforafixedpopulationmaybeextendedinavarietyofwaystoa
variablepopulation.Forexample,theutilitarianfunctionmaybeextendedtoaverageutilitarianism
(Hurka,1982),whoseSWFistheaverageofpeopleswellbeing.Averageutilitarianismgivesnovalue
toincreasingnumbersofpeople.Theimplicitorexplicitgoalofagreatdealofpolicymakingisto
promotepercapitawellbeing(Hardin,1968).Thisistoadoptaverageutilitarianism.Thisgoaltends
tofavourantinatalistpolicies,aimedatlimitingpopulation.Itwouldstronglyfavourpopulation
controlasameansofmitigatingclimatechange,anditwouldnottakeacollapseofpopulationto
be,initself,abadthing.
Theutilitarianfunctionmayalternativelybeextendedtocriticallevelutilitarianism,whoseSWFis
thetotaloftheamountbywhicheachpersonswellbeingexceedssomefixedcriticallevel.Itis
Equation3.4.4. V=(w
1
c)+(w
2
c)++(w
J
c)
wherecisthecriticallevel(Broome,2004;Blackorbyetal.,2005).Otherthingsbeingequal,critical
levelutilitarianismfavoursaddingpeopletothepopulationiftheirwellbeingisabovethecritical
level.
Totalutilitarianism(Sidgwick,1907)iscriticallevelutilitarianismwiththecriticallevelsettozero.
ItsSWFisthetotalofpeopleswellbeing.TotalutilitarianismisimplicitinmanyIntegrated
AssessmentModels(IAMs)ofclimatechange(e.g.,Nordhaus,2008).Itsmeaningisindeterminate
untilitissettledwhichleveloflifetimewellbeingtocountaszero.Manytotalutilitarianssetthe
zeroatthelevelofalifethathasnogoodorbadexperiencesthatislivedinacomathroughout,
forinstance(Arrhenius,forthcoming).Sincepeopleonaverageleadbetterlivesthanthis,total
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utilitarianismwiththiszerotendstobelessantinatalistthanaverageutilitarianism.However,it
doesnotnecessarilyfavourincreasingpopulation.Eachnewpersondamagesthewellbeingof
existingpeople,throughtheiremissionsofGHG,theirotherdemandsonEarthslimitedresources,
andtheemissionsoftheirprogeny.Ifthedamageanaveragepersondoestoothersintotalexceeds
theirownwellbeing,totalutilitarianism,likeaverageutilitarianism,favourspopulationcontrolasa
meansofmitigatingclimatechange.
12
Eachoftheexistingethicaltheoriesaboutthevalueofpopulationhasintuitivelyunattractive
implications(Parfit,1986).Averageutilitarianismissubjecttoparticularlysevereobjections.
Arrhenius(forthcoming)crystallizestheproblemsofpopulationethicsintheformofimpossibility
theorems.Sofar,noconsensushasemergedaboutthevalueofpopulation.Yetclimatechange
policiesareexpectedtoaffectthesizeoftheworldspopulation,anddifferenttheoriesofvalue
implyverydifferentconclusionsaboutthevalueofthesepolicies.Thisisaseriousdifficultyfor
evaluatingpoliciesaimedatmitigatingclimatechange,whichhaslargelybeenignoredinthe
literature(Broome,2012).
3.5 Economics,rights,andduties
Sections3.2,3.3and3.4haveoutlinedsomeoftheethicalprinciplesthatcanguidedecision
makingforclimatechange.Theremainderofthischapterislargelyconcernedwiththeconceptsand
methodsofeconomics.Theycanbeusedtoaggregatevaluesatdifferenttimesandplaces,and
weighaggregatevaluefordifferentpolicyactions.Theycanalsobeusedtodrawinformationabout
valuefromthedataprovidedbypricesandmarkets.Economicscanmeasurediversebenefitsand
harms,takingaccountofuncertainty,toarriveatoveralljudgementsofvalue.Italsohasmuchto
contributetothechoiceanddesignofpolicymechanisms,asSection3.8andlaterchaptersshow.
Valuationsprovidedbyeconomicscanbeusedonalargescale:IAMscanbeusedtosimulatethe
evolutionoftheworld'seconomyunderdifferentclimateregimesanddetermineaneconomically
efficientreductioninGHGemissions.Onasmallerscale,economicmethodsofCBAcanbeusedin
choosingbetweenparticularpoliciesandtechnologiesformitigation.
Economicsismuchmorethanamethodofvaluation.Forexample,itshowshowdecisionmaking
canbedecentralizedthroughmarketmechanisms.Thishasimportantapplicationsinpolicy
instrumentsformitigationwithpotentialforcosteffectivenessandefficiency(Chapters6and15).
Economicanalysiscanalsogiveguidanceonhowpolicymechanismsforinternationalcooperation
onmitigationcanbedesignedtoovercomefreeriderproblems(Chapters13and14).However,the
methodsofeconomicsarelimitedinwhattheycando.Theycanbebasedonethicalprinciples,as
Section3.6explains.Buttheycannottakeaccountofeveryethicalprinciple.Theyaresuitedto
measuringandaggregatingthewellbeingofhumans,butnottotakingaccountofjusticeandrights
(withtheexceptionofdistributivejusticeseebelow),orothervaluesapartfromhumanwellbeing.
Moreover,eveninmeasuringandaggregatingwellbeing,theydependoncertainspecificethical
assumptions.Thissectiondescribesthelimitsofeconomicmethods.
Becauseoftheirlimitations,economicvaluationsareoftennotontheirownagoodbasisfor
decisionmaking.Theyfrequentlyneedtobesupplementedbyotherethicalconsiderations.Itmay
thenbeappropriatetoapplytechniquesofmulticriteriaanalysis(MCA),discussedinSection3.7.2.1
(ZelenyandCochrane,1982;KeeneyandRaiffa,1993;DeMontisetal.,2005).
12
Harford(1998)showsthatanadditionalpersoncausesdamagefromherownemissionsandtheemissions
ofherchildren(andoftheirchildren,etc.).KellyandKolstad(2001)examinethisissueinthespecificcontext
ofclimatechange.
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3.5.1 Limitsofeconomicsinguidingdecisionmaking
Economicscanmeasureandaggregatehumanwellbeing,butSections3.2,3.3and3.4explainthat
wellbeingmaybeonlyoneofseveralcriteriaforchoosingamongalternativemitigationpolicies.
Otherethicalconsiderationsarenotreflectedineconomicvaluations,andthoseconsiderationsmay
beextremelyimportantforparticulardecisionsthathavetobemade.Forexample,somehave
contendedthatcountriesthathaveemittedagreatdealofGHGinthepastowerestitutionto
countriesthathavebeenharmedbytheiremissions.Ifso,thisisanimportantconsiderationin
determininghowmuchfinancerichcountriesshouldprovidetopoorercountriestohelpwiththeir
mitigationefforts.Itsuggeststhateconomicsalonecannotbeusedtodeterminewhoshouldbear
theburdenofmitigation.
Whatethicalconsiderationscaneconomicscoversatisfactorily?Sincethemethodsofeconomicsare
concernedwithvalue,theydonottakeaccountofjusticeandrightsingeneral.However,
distributivejusticecanbeaccommodatedwithineconomics,becauseitcanbeunderstoodasa
value:specificallythevalueofequality.Thetheoryoffairnesswithineconomics(Fleurbaey,2008)is
anaccountofdistributivejustice.Itassumesthatthelevelofdistributivejusticewithinasocietyisa
functionofthewellbeingsofindividuals,whichmeansitcanbereflectedintheaggregationof
wellbeing.Inparticular,itmaybemeasuredbythedegreeofinequalityinwellbeing,usingoneof
thestandardmeasuresofinequalitysuchastheGinicoefficient(Gini,1912),asdiscussedinthe
previoussection.TheAtkinsonmeasureofinequality(Atkinson,1970)isbasedonanadditively
separableSWF,andisthereforeparticularlyappropriateforrepresentingtheprioritariantheory
describedinSection3.4.6.Furthermore,distributivejusticecanbereflectedinweights
incorporatedintoeconomicevaluationsasSection3.6explains.
Economicsisnotwellsuitedtotakingintoaccountmanyotheraspectsofjustice,including
compensatoryjustice.Forexample,aCBAmightnotshowthedrowningofaPacificislandasabig
loss,sincetheislandhasfewinhabitantsandrelativelylittleeconomicactivity.Itmightconclude
thatmoregoodwouldbedoneintotalbyallowingtheislandtodrown:thecostoftheradicalaction
thatwouldberequiredtosavetheislandbymitigatingclimatechangegloballywouldbemuch
greaterthanthebenefitofsavingtheisland.Thismightbethecorrectconclusionintermsofoverall
aggregationofcostsandbenefits.Buttheisland'sinhabitantsmighthavearightnottohavetheir
homesandlivelihoodsdestroyedasaresultoftheGHGemissionsofrichernationsfaraway.Ifthat
isso,theirrightmayoverridetheconclusionsofCBA.ItmaygivethosenationswhoemitGHGaduty
toprotectthepeoplewhosufferfromit,oratleasttomakerestitutiontothemforanyharmsthey
suffer.
Eveninareaswherethemethodsofeconomicscanbeappliedinprinciple,theycannotbeaccepted
withoutquestion(Jamieson,1992;Sagoff,2008).Particularsimplifyingassumptionsarealways
required,asshownthroughoutthischapter.Theseassumptionsarenotalwaysaccurateor
appropriate,anddecisionmakersneedtokeepinmindtheresultinglimitationsoftheeconomic
analyses.Forexample,climatechangewillshortenmanypeopleslives.Thisharmmayinprinciple
beincludedwithinaCBA,butitremainshighlycontentioushowthatshouldbedone.Another
problemisthat,becauseeconomicscanprovideconcrete,quantitativeestimatesofsomebutnotall
values,lessquantifiableconsiderationsmayreceivelessattentionthantheydeserve.
Theextraordinaryscopeandscaleofclimatechangeraisesparticulardifficultiesforeconomic
methods(Stern,forthcoming).First,manyofthecommonmethodsofvaluationineconomicsare
bestdesignedformarginalchanges,whereassomeoftheimpactsofclimatechangeandeffortsat
mitigationarenotmarginal(HowarthandNorgaard,1992).Second,theverylongtimescaleof
climatechangemakesthediscountratecrucialatthesametimeasitmakesithighlycontroversial
(seeSection3.6.2).Third,thescopeoftheproblemmeansitencompassestheworld'sextremesof
wealthandpoverty,soquestionsofdistributionbecomeespeciallyimportantandespeciallydifficult.
Fourth,measuringnonmarketvaluessuchastheexistenceofspecies,naturalenvironments,or
traditionalwaysoflifeoflocalsocietiesisfraughtwithdifficulty.Fifth,theuncertaintythat
26of128

surroundsclimatechangeisverygreat.Itincludesthelikelihoodofirreversiblechangestosocieties
andtonature,andevenasmallchanceofcatastrophe.Thisdegreeofuncertaintysetsspecial
problemsforeconomics(Nelson,2013).
Box 3.2Who mitigates versus who pays?

Tomitigateclimatechange,emissionsofGHGwillneedtobereducedtovaryingdegreesworldwide.
Economicanalysistellsusthat,forthesakeofcosteffectiveness,thegreatestreductionsshouldbe
madewheretheycanbemademostcheaply.Ideally,emissionsshouldbereducedineachplaceto
justtheextentthatmakesthemarginalcostoffurtherreductionsthesameeverywhere.Onewayof
achievingthisresultistohaveacarbonpricethatisuniformacrosstheworld;oritmightbe
approximatedbyamixofpolicyinstruments(seeSection3.8).
Since,forefficiency,mitigationshouldtakeplacewhereitischeapest,emissionsofGHGshouldbe
reducedinmanydevelopingcountries,aswellasinrichones.However,itdoesnotfollowthat
mitigationmustbepaidforbythosedevelopingcountries;richcountriesmaypayformitigationthat
takesplaceinpoorcountries.Financialflowsbetweencountriesmakeitpossibletoseparatethe
questionofwheremitigationshouldtakeplacefromthequestionofwhoshouldpayforit.Because
mitigatingclimatechangedemandsverylargescaleaction,ifputinplacethesetransfersmight
becomeasignificantfactorintheinternationaldistributionofwealth.Providedappropriatefinancial
transfersaremade,thequestionofwheremitigationshouldtakeplaceislargelyamatterforthe
economictheoryofefficiency,temperedbyethicalconsiderations.Butthedistributionofwealthisa
matterofjusticeamongcountries,andamajorissueinthepoliticsofclimatechange(Stanton,
2011).Itispartlyamatterofdistributivejustice,whicheconomicscantakeintoaccount,but
compensatoryjusticemayalsobeinvolved,whichisanissueforethics(Section3.3).
3.6 Aggregationofcostsandbenefits
3.6.1 Aggregatingindividualwellbeing
Policiesthatrespondtoclimatechangealmostalwayshavesomegoodandsomebadeffects;wesay
theyhavebenefitsandcosts.Inchoosingapolicy,wemaytreatoneoftheavailableoptionsasa
standardofcomparisonforinstance,thestatusquo.Otheroptionswillhavecostsandbenefits
relativetothisstandard.Mostmitigationstrategieshavecostsinthepresentandyieldbenefitsin
thefuture.Policymakinginvolvesassessingthevaluesofthesebenefitsandcostsandweighing
themagainsteachother.Chapter6containsanexampleinwhichdifferentmitigationstrategies
yieldingdifferenttemporalallocationsofclimateimpactsarecompared.Theweighingofcostsand
benefitsneednotbeapreciseprocess.Sections3.2and3.4explainthatcostsandbenefitsmaybe
valuesofverydifferentsorts,whichcannotbepreciselyweighedagainsteachother.Theymayalso
beveryuncertain.
Nevertheless,thedisciplineofeconomicshasdevelopedmethodsformeasuringnumericallyvalues
ofoneparticularsort:humanwellbeing.Inthissection,wedescribethesemethods;Section3.5
explainstheirseriouslimitations.Economistsoftenusemoneyastheirunitofmeasurementfor
values,butnotalways.Inhealtheconomics,forexample,theunitofbenefitforhealthcareisoften
thequalityadjustedlifeyear(qaly)(seeBox3.3).Ineconomics,monetarymeasuresofvalueare
usedincosteffectivenessanalysis(seeWeimerandVining,2010),inestimatingthesocialcostof
carbon(seeSection3.9.4),inintertemporaloptimizationwithinIAMs(e.g.,Stern,2007;Nordhaus,
2008),inCBAandelsewhere.
Generallytheoverallvalueofaggregatewellbeingneedstobemeasured,andnotmerelythe
wellbeingofeachindividual.Anumericalmeasureofoverallwellbeingmaybebasedonethical
analysis,throughaSWFofthesortintroducedinSection3.4.Thisbasisofvaluationisdescribed
27of128

here.TheliteraturecontainsaputativealternativebasisbuiltonthepotentialParetocriterion,but
thisissubjecttosevereobjections(DeScitovszky,1941;Gorman,1955;Arrow,1963,ch.4;Boadway
andBruce,1984;BlackorbyandDonaldson,1990).
WetakeasourpointofdeparturetheformulationoftheSWFinEquation3.4.2,whichisbasedon
assumptionsdescribedinSection3.4.6.Tothesewenowaddafurtherassumptionthattimesare
separable,meaningthatthedistributionofwellbeingcanbeevaluatedateachtimeseparatelyand
itsoverallvalueisanaggregateoftheseseparatesnapshotvalues.AtheoremofGormans(1968)
ensuresthatsocialwelfarethentakesthefullyadditivelyseparableform:
Equation3.6.1. V=
1
V
1
+
2
V
2
+...+
T
V
T
whereeachV
t
isthevalueofwellbeingattimetandisthetotalofthevaluesofindividualwellbeings
atthattime.Thatis:
Equation3.6.2. V
t
=v(w
1t
)+v(w
2t
)+...+v(w
It
).
Eachw
it
isthetemporalwellbeingofpersoniattimet.Each
t
isadiscountfactor,whichshows
howwellbeingattimetisvaluedrelativetowellbeingatothertimes.
Theassumptionthattimesareseparablehassomeunsatisfactoryconsequences.First,itcannotgive
valuetoequalitybetweenpeopleslivestakenasawhole,butonlytoequalityateachparticular
time.Second,Equation3.6.1isinconsistentwithaverageutilitarianism,orwithvaluingpercapita
temporalwellbeingatanytime,whereaspercapitawellbeingisacommonobjectofclimatechange
policy.Third,Equation3.6.1makesnodistinctionbetweendiscountingwithinasinglepersonslife
andintergenerationaldiscounting.Yetacasecanbemadefortreatingthesetwosortsof
discountingdifferently(Kaplowetal.,2010).Nevertheless,thisassumptionandtheresulting
equationEquation3.6.1underliestheusualpracticeofeconomistswhenmakingvaluations.First
theyaggregatetemporalwellbeingacrosspeopleateachtimetodetermineasnapshotsocialvalue
foreachtime.Thenallthesevaluesareaggregatedacrosstimes.Thissectionandthenextdescribe
theusualpracticebasedontheseequations.
13
Thesecondstepaggregationacrosstimeis
consideredinSection3.6.1.Therestofthissectionconsidersthefirststepaggregationattime.
3.6.1.1 Monetaryvalues
Climatepoliciesaffectthewellbeingofindividualsbychangingtheirenvironmentandtheir
individualconsumption.Thefirststepinapracticaleconomicvaluationistoassignamonetaryvalue
tothecostsandbenefitsthatcometoeachpersonateachtimefromthechange.Thisvaluemaybe
eithertheamountofmoneythepersoniswillingtopayforthechange,ortheamounttheyare
willingtoacceptascompensationforit.Ifthechangeisamarginalincreaseordecreaseinthe
personsconsumptionofamarketedcommodity,itwillbeequaltothepriceofthecommodity.
Theeffectofachangeonthepersonswellbeingisthemonetaryvalueofthechangemultipliedby
therateatwhichmoneycontributestothepersonswellbeing.Thisrateisthemarginalbenefitof
moneyormarginalutilityofmoneytotheperson.Itisgenerallyassumedtodiminishwithincreasing
income(Marshall,1890;Dalton,1920;Pigou,1932,p.89;Atkinson,1970).
Theeffectsofthechangeoneachpersonswellbeingateachtimemustnextbeaggregatedacross
peopletodeterminetheeffectonsocialvalue.Equation3.6.2showshoweachpersonswellbeing
contributestosocialvaluethroughthevaluefunctionv().Thechangeinwellbeingmustthereforebe
multipliedbythemarginalsocialvalueofwellbeing,whichisthefirstderivativeofthisfunction.Itis
13
Analternativeapproachdoesnotassumeseparabilityoftimes.Firstitdeterminesalifetimewellbeingfor
eachpersoninthewaydescribedinSection3.4.5.Forinstance,islifetimewellbeingmightbeadiscounted
totalofhertemporalwellbeings.ThenthisapproachaggregatesacrosspeopleusingEquation3.4.2.See
FullertonandRogers(1993),MurphyandTopel(2006)andKaplowetal.(2010).
28of128

anethicalparameter.Accordingtoutilitarianism,thatmarginalsocialvalueisconstantandthesame
foreveryone;accordingtoprioritarianism,itdiminisheswithincreasingwellbeing.
Insum,theeffectofachangeinsocialvalueataparticulartimeiscalculatedbyaggregatingthe
monetaryvalueofthechangetoeachperson,weightedbythesocialmarginalvalueofmoneytothe
person,whichistheproductofthemarginalbenefitofmoneytothatpersonandthemarginalsocial
valueoftheirwellbeing(Fleurbaey,2009).Sincethemarginalbenefitofmoneyisgenerallyassumed
todiminishwithincreasingincome,themarginalsocialvalueofmoneycanbeassumedtodothe
same.
ManypracticalCBAsvaluecostsandbenefitsaccordingtoaggregatedmonetaryvalueswithoutany
weighting.Theimplicitassumptionisthatthemarginalsocialvalueofmoneyisthesameforeach
person.TheconsequenceofomittingweightsisparticularlymarkedwhenapplyingCBAtoclimate
change,whereextremedifferencesinwealthbetweenrichandpoorcountriesneedtobetakeninto
account.AnexampleappearedintheSecondAssessmentReportoftheIPCC(1995),whereit
consideredthevalueofhumanlife.Thereportshowedthattheeffectofignoringweightingfactors
wouldbetoassignperhapstwentytimesmorevaluetoanAmericanlifethantoanIndianlife.(See
alsoBox3.3).Evenwithinasinglecountry,weightingmakesabigdifference.Drze(1998)examined
thebenefitsofreducingpollutioninDelhiandcontrastsNewDelhi,whichisrelativelyrich,with
Delhi,whichisrelativelypoorer.Ifthecriterionisreducingpollutionforthegreatestnumberof
people,thenprojectsinDelhiwillbefavoured;whereasprojectsinNewDelhiwillbefavouredifthe
criterionisunweightednetbenefits.
Box 3.3 The value of life.

Climatechangemayshortenmanypeopleslives,andmitigatingclimatechangemayextendmany
peopleslives.LivesmustthereforebeincludedinanyCBAthatisconcernedwithclimatechange.
Theliteraturecontainstwodifferentapproachestovaluingapersonslife.Oneisbasedonthe
lengthoftimethepersongainsiftheirlifeissaved,adjustedaccordingtothequalityoftheirlife
duringthattime(qaly),anapproachwidelyusedtovaluelivesinhealtheconomicsandpublic
health.Forassessingtheimpactofclimateonhumanhealthandlongevity,theWorldHealth
Organizationusesthedisabilityadjustedlifeyear(daly),whichissimilar(Mathersetal.,2009;for
dalyssee,Murray,1994).
Theotherapproachvaluestheextensionofapersonslifeonthebasisofwhattheywouldbewilling
topayforit.Inpractice,thisfigureisusuallyderivedfromwhatthepersonwouldbewillingtopay
foranincreasedchanceofhavinganextendedlife.If,say,apersoniswillingtopay$100toreduce
herchanceofdyinginaroadaccidentfrom2in10,000to1in10,000,thenherwillingnesstopay
(WTP)forextendingherlifeis$100x10,000=$1million.AWTPmeasureofthevalueoflifeis
widelyusedinenvironmentaleconomics(e.g.,U.S.EnvironmentalProtectionAgency,2010
AppendixB);itisoftenknownasavalueofstatisticallife(ViscusiandAldy,2003).
Themaindifferencesbetweentheseapproachesare:
1. SinceWTPismeasuredinmoney,itisimmediatelycomparablewithothervaluesmeasuredin
money.Qalysneedtobeassignedamonetaryvaluetomakethemcomparable(Masonetal.,
2009).
2. Theuseofqalysimpliesatheoreticalassumptionaboutthevalueofextendingalifethatitis
proportionaltothelengthoftheextension,adjustedforqualitywhereasWTPmethods
generallyleaveitentirelytotheindividualtosetavalueonextendingtheirownlife(Broome,
1994).
3. Eachmeasureimpliesadifferentbasisforinterpersonalcomparisonsofvalue.Whenqalysare
aggregatedacrosspeoplebyaddition,theimplicitassumptionisthatayearofhealthylifehas
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thesamevalueforeachperson.WhenWTPisaggregatedacrosspeoplebyaddition(without
distributionalweights),theimplicitassumptionisthatadollarhasthesamevalueforeach
person.Neitherassumptionisaccurate,butforcomparisonsinvolvingveryrichcountriesand
verypoorones,theformerassumptionseemsnearerthetruth(Broome,2012,ch.9).
Thetwoapproachescanconverge.Thetextexplainsthatdistributionalweightsshouldbeappliedto
monetaryvaluesbeforetheyareaggregated,andthisistrueofWTPforextendinglife.Ifappropriate
weightsareapplied,WTPbecomesmorenearlyproportionaltoqalys.Indeed,ifweadoptthe
assumptionthataqalyhasthesamevalueforeachperson,wemayuseittogiveusabasisfor
calculatingdistributionalweightstoapplytomoneyvalues(Somanathan,2006).Forexample,
supposeWTPfora30yearextensiontohealthylifeintheUnitedStatesisUSD5million,andinIndia
itisUSD250,000;then,onthisassumption,USD1toanIndianhasthesamesocialvalueasUSD20
toanAmerican.
Anotherexampleofamonetarymeasureofvaluethatdoesnotincorporatedistributionalweightsis
GrossDomesticProduct(GDP).ToevaluatechangesbytheireffectonGDPis,onceagain,toassume
thatthevalueofadollartoarichpersonisthesameasitsvaluetoapoorperson(Schneideretal.,
2000).
ItissometimesassumedthatCBAisconductedagainstthebackgroundofefficientmarketsandan
optimalredistributivetaxationsystem,sothatthedistributionofincomecanbetakenasidealfrom
societyspointofview.Ifthatweretrue,itmightreducetheneedfordistributionalweights.Butthis
isnotanacceptableassumptionformostprojectsaimedatclimatechange.Creditandrisksharing
marketsareimperfectattheworldlevel,globalcoordinationislimitedbyagencyproblems,
informationisasymmetric,andnosupranationaltaxauthoritycanreduceworldwideinequalities.
Furthermore,intergenerationaltransfersaredifficult.Inanycase,thepoweroftaxationto
redistributeincomeislimitedbecauseredistributivetaxescreateinefficiency(Mirrlees,1971).Even
optimaltaxationwouldthereforenotremovetheneedfordistributionalweights.Thus,the
assumptionthatincomesare(secondbest)optimallyredistributeddoesnotneutralizetheargument
forwelfareweightsinaggregatingcostsandbenefits.
Theneedforweightsmakesvaluationmorecomplicatedinpractice.Thedataavailableforcostsand
benefitsisgenerallyaggregatedacrosspeople,ratherthanseparatedforparticularindividuals.This
meansthatweightscannotbeapplieddirectlytoindividualscostsandbenefits,astheyideally
shouldbe.Thisdifficultycanbeovercomebyapplyingsuitablycalculatedweightstothepricesof
commodities,calculatedonthebasisofincomedistributionofeachcommoditysconsumers.
14
Box 3.4Optimality versus Pareto improvement in climate change

Theassessmentofachangenormallyrequiresbenefitstobeweighedagainstcosts.Anexceptionis
achangeknownasaParetoimprovementthatbenefitssomepeoplewithoutharminganyone.
Climatechangeprovidesonepossibleexample.GHGisanexternality:apersonwhoseactivitiesemit
GHGdoesnotbearthefullcostoftheiractivities;someofthecostsarebornebythosewhoare
harmedbytheemissions.Consequently,climatechangecausesParetoinefficiency,whichmeans
thataParetoimprovementwouldinprinciplebepossible.Indeeditwouldbepossibletoremovethe
inefficiencyinawaythatrequiresnosacrificebyanyoneinanygeneration,comparedtobusiness
asusual(BAU).Toachievethisresult,thepresentgenerationmustreallocateinvestmenttowards
projectsthatreduceemissionsofGHG,whilemaintainingitsownconsumption.Becauseitmaintains
itsownconsumption,thepresentgenerationmakesnosacrifice.Becauseitreducesitsconventional
14
ThemethodispresentedinDrzeandStern(1989,pp.909989).Applicationsofdistributionalweightsto
climatechangeappearinAzarandSterner(1996);andFankhauseretal.(1997).
30of128

investment,thisgenerationbequeathslessconventionalcapitaltofuturegenerations.Otherthings
beingequal,thisreallocationwouldmakefuture generationslesswelloff,butthereductionin
emissionswillmorethancompensatethemforthatloss(Stern,forthcoming;Foley,2009;Rezaiet
al.,2011).
Itiscommonlyassumedthatclimatechangecallsforsacrificesbythepresentgenerationforthe
sakeoffuturegenerations.Figure3.2illustrateswhy.Thepossibilityfrontiershowswhat
combinationsofconsumptionarepossibleforpresentandfuturegenerations.Becauseofthe
externality,Businessasusualliesbelowthisfrontier.ThefrontiercanbereachedbyaPareto
improvement.ContoursoftwodifferentSWFsareshown:oneSWFplacesmorevaluethanthe
otheronfutureconsumptionrelativetopresentconsumption.Thetwocontoursreflectinapurely
illustrativewaySWFsthatareimplicitinStern(2007)andNordhaus(2008)respectively.Thepoint
whereacontourtouchesthepossibilityfrontieristhesocialoptimumaccordingtothatfunction.
NeitheroptimumisaParetoimprovementonbusinessasusual.Althoughtheinefficiencycouldbe
removedwithoutanysacrifices,thebestoutcomesdescribedbybothSternandNordhausdo
requireasacrificebythepresentgeneration.
Fromaninternationalratherthananintergenerationalperspective,itisalsotrueonthesame
groundsthattheinefficiencyofclimatechangecanberemovedwithoutanynationmakinga
sacrifice(PosnerandWeisbach,2010).Butitdoesnotfollowthatthiswouldbethebestoutcome.
Figure 3.2. Illustrating optimality versus Pareto improvement in climate change.

3.6.2 Aggregatingcostsandbenefitsacrosstime
Inclimatechangedecisions,aggregatingtheprosandconsofalternativeactionsisparticularly
difficultbecausemostbenefitsofmitigationwillmaterializeonlyinthedistantfuture.Ontheother
hand,thecostsofmitigationarebornetoday.Usingadiscountratecanthereforemakeabig
differenceinevaluatinglongtermprojectsorinvestmentsforclimatechangemitigation.For
example,abenefitof$1millionoccurringin100yearshasapresentvalueof$369,000ifthe
discountrateis1%,$52,000ifitis3%,and$1,152ifitis7%.Animportantdebateineconomics
sinceAR4,spawnedinpartbytheStern(2007)Review,hascentredonthediscountratethatshould
beappliedinevaluatingclimatechangeimpactsandmitigationcosts(Nordhaus,2007;Stern,2008;
Dasgupta,2008;Smith,2010;seealsoQuiggin,2008).
31of128

Adescriptiveapproachtodiscountingexamineshowhumanbeingstradeoffthepresentagainst
theirownfutures.Itfocusesonhowindividualsandmarketsmakeintertemporalfinancial
decisions,asrevealedbythemarketinterestrate.Asimplearbitrageargumentfavoursusingthe
interestrateasthediscountrateforclimatepolicydecisions:ifonereallocatescapitalfromasafe
butmarginalproject(whosereturnmustbeequaltotheinterestrate)toasafeprojectwiththe
samematuritywhosereturnissmallerthantheinterestrate,thenetimpactisnullforthecurrent
generation,andisnegativeforfuturegenerations.Thus,whenprojectsarefinancedbya
reallocationofcapitalratherthananincreaseinaggregatesaving(reducingconsumption),the
discountrateshouldbeequaltotheshadowcostofcapital.
Table3.1documentsrealreturnsondifferentclassesofassetsinwesterncountries,including
governmentbonds,whichareusuallyconsideredtobethesafest,mostriskfreeassets.Ascanbe
seen,theseratesareclosetozero.
Table 3.1: Real returns of financial assets. Source: Updated data from (Dimson, 2002), in Gollier
(2012).

Government Bills
(maturity <1 year)
Government Bonds
(maturity =10 years)
Equity
1900-2006 1971-2006 1900-2006 1971-2006 1900-2006 1971-2006
Australia
0.6% 2.5%
1.3% 2.8% 7.8% 6.3%
France
-2.9% 1.2%
-0.3% 6.6% 3.7% 7.8%
Japan
-2.0% 0.4%
-1.3% 3.9% 4.5% 5.0%
United Kingdom
1.0% 1.9%
1.3% 3.9% 5.6% 7.1%
USA
1.0% 1.3%
1.9% 4.0% 6.6% 6.6%
Thesamearbitrageargumentcouldbeusedtodiscountriskyprojects.Inthatcase,thediscountrate
shouldbeequaltotheexpectedrateofreturnoftradedassetswiththesameriskprofile.For
example,iftheprojecthasthesameriskprofileasadiversifiedportfolioofequity,oneshoulduse
theexpectedrateofreturnofequity,asdocumentedin
Table3.1.Itcontainsarelativelylargeequitypremium.
Thisdescriptiveapproachtothediscountratehasmanydrawbacks.First,weshouldnotexpect
marketstoaggregatepreferencesefficientlywhensomeagentsarenotabletotrade,asisthecase
forfuturegenerations(Diamond,1977).Second,currentinterestratesaredrivenbythepotentially
impatientattitudeofcurrentconsumerstowardstransferringtheirownconsumptiontothefuture.
Butclimatechangeisabouttransferringconsumptionacrossdifferentpeopleandgenerations,so
thatdeterminingtheappropriatesocialdiscountrateismostlyanormativeproblem.Thirdly,wedo
notobservesafeassetswithmaturitiessimilartothoseofclimateimpacts,sothearbitrage
argumentcannotbeapplied.
Wenowexaminetheproblemofasocialpolicymakerwhomustmakeclimatepolicychoicesusinga
SWFdiscussedearlier.Inaggregatingdamagesandcostsovertime,inordertomakethings
comparableacrosslongperiodswevalueconsumptionchangesinthefuturebyequivalentchanges
inconsumptiontoday.Thesechangesinthestructureofconsumptionshouldbeevaluatedin
monetarytermsusingvaluesdescribedinSection3.6.1.1.Theincorporationofthe
intergenerationalequityobjectivehaschallengedthetraditionalCBAapproachfortheevaluationof
climatechangepolicies.PractitionersofCBAandevaluatorsareexpectedtousediscountratesthat
areconsistentwiththeprespecifiedSWFthatrepresentsthesocietysintergenerationalvalues,as
inAR2(1995).WesimplifythemodelusedinSection3.6.1.1byassumingonlyonegenerationper
periodandonlyoneconsumergood.Inanuncertaincontext,anactionissociallydesirableifitraises
theSWFgivenbyEquation3.6.1:
Equation3.6.3. v = _ c
-6t
Eu(c
t
),
t=0

32of128

whereu(c
t
) = :(w(c
t
)) = I
t
isthecontributiontotheSWFofgenerationtconsumingc
t
.Becausec
t
isuncertain,oneshouldtaketheexpectationEu(c
t
)ofthisuncertaincontribution.Theconcavityof
functionucombinesprioritarism(inequalityaversion)andriskaversion.Parametermeasuresour
collectivepurepreferenceforthepresent,sothatthediscountfactorJ(t) = c
-6t
decreases
exponentially.isanethicalparameterthatisnotrelatedtothelevelofimpatienceshownby
individualsinweightingtheirownfuturewellbeing(Fredericketal.,2002).Manyauthorshave
arguedforarateofzeroornearzero(Ramsey,1928;Pigou,1932;Harrod,1949;Parfit,1986;
Cowen,1992;Schelling,1995;Broome,2004;Stern,2008).Assuming>0wouldpenalizefuture
generationsjustbecausetheyarebornlater.Manyregardsuchdatismtobeasethically
unacceptableassexismorracism.Cowen(1992)pointsoutthatdiscountingviolatesthePareto
principleforapersonwhomightliveeitheratonetimeoratalatertime.Somehavearguedfora
positiverate(DasguptaandHeal,1980;Arrow,1999).Atraditionalargumentagainstazerorateis
thatitplacesanextremelyheavymoralburdenonthecurrentgeneration(see,e.g.,Dasgupta,
2007).Butevenwheno=0,asweseebelow,westillendupwithadiscountrateofabout4%,which
ishigherthanitwasduringthelastcentury.Stern(2008)used=0.1%toaccountforriskof
extinction.Weconcludethatabroadconsensusisforazeroornearzeropurerateoftime
preferenceforthepresent.
Inagrowingeconomy(c
t
> c
0
),investingforthefutureinasafeprojecthastheundesirableeffect
oftransferringconsumptionfromthepoor(currentgenerations)tothewealthy(future
generations).Thus,investinginsafeprojectsraisesintergenerationalinequalities.Thediscountrate
canthenbeinterpretedastheminimumrateofreturnthatisnecessarytocompensateforthis
adverseeffectontheSWFofinvestingforthefuture.ThisissummarizedbytheRamseyrule(i.e.,
theconsumptionapproachtodiscounting)(Ramsey,1928).Assumingastandardconstantelasticity
intheconsumptionutilityfunction(e.g.,u(c)=c
1
/(1)),andnouncertainty,
15
theminimumrateof
return
t
ofaprojectthatmarginallytransfersconsumptionfrom0totandthatguaranteesan
increaseofintergenerationalwelfareVisdefinedasfollows:
Equation3.6.4.
t
=+g
t

whererepresentsthepurerateatwhichsocietydiscountstheutilityoffuturegenerations,andg
t
istheannualizedgrowthrateofmonetizedconsumptionanticipatedatdatet,and>0measures
inequalityaversion.Thegreatertheanticipatedeconomicgrowthrateg
t
,thehigherthesocial
discountrate
t
.Thegrowthrateg
t
isanempiricalvariablethatrepresentsourcollectivebeliefs
aboutprospectiveeconomicgrowth.InBox3.5,wediscussplausiblevaluesfortheinequality
aversionparameter.
15
Foralternativeassumptions,seeGollier(2002).
33of128

Box 3.5 Plausible values for collective inequality aversion ()
Considerthefollowingthoughtexperiment.Acountryhastwoequallypopulatedsocialgroups.The
wealthygroupconsumestwiceasmanygoodsandservicesasthepoorgroup.Consideralsoan
economicpolicywhoseaimistoincreaseconsumptionby1unitforeverypersoninthepoorgroup.
Thisimpliesareductionofconsumptionforeverywealthypersonbyxunits,whichmaynotbeequal
to1owingtoinherentinefficienciesinthetaxsystem.Ifoneisneutralaboutinequalities,onewould
notacceptthispolicyifxislargerthan1.Inequalityaversionjustifiesacceptingsomeproductive
inefficiency,sothatanxlargerthan1maybeallowed.Whatisthemaximumvalueofxthatone
wouldaccepttoimplementthepolicy?Answeringthisquestiontellsussomethingaboutinequality
aversion,withalargexbeingassociatedwithalarger.Ifoneiscollectivelyreadytosacrificeas
muchasx=2unitsofconsumptionfromtherichtoprovideoneunitofconsumptiontothepoor,this
iscompatiblewithaninequalityaversionindex=1.Anxof4or8wouldcorrespondtoanindexof
inequalityaversionof2and3,respectively.
Behindtheveilofignorance(Rawls,1971),ourcollectivepreferencestowardsinequalityshouldbe
identifiedasourindividualriskaversion.Theeconomicliteratureinfinanceandmacroeconomics
usuallyassumesabetween1and5toexplainobservedbehaviourstowardsrisk,aswellasasset
prices(Kocherlakota,1996).
Byusinganearzerotimediscountrate,Stern(2007,seealso2008)advancedthedebateinthe
literature.Despitedisagreementontheempiricalapproachtoestimatingthediscountrate,the
literaturesuggestsconsensusforusingdecliningdiscountratesovertime.Differentprominent
authorsandcommitteeshavetakendifferentpositionsonthevaluesof,andg,makingdifferent
recommendationsforthesocialdiscountrate.WesummarizetheminTable3.2.
Table 3.2. Calibration of the discount rate based on the Ramsey rule (Equation 3.6.4.)
Author
Rate of pure
preference
for present
Inequality
aversion
Anticipated
Growth
rate
Implied
social
discount rate
Cline (1992) 0% 1.5 1% 1.5%
IPCC (1996) 0% 1.5-2 1.6% - 8% 2.4% - 16%
Arrow (1999) 0% 2 2% 4%
UK: Green Book (HM Treasury, 2003) 1.5% 1 2% 3.5%*
US UMB (2003)** 3% - 7%
France: Rapport Lebgue (2005) 0% 2 2% 4%*
Stern (2007) 0.1% 1 1.3% 1.4%
Arrow (2007) 2-3
Dasgupta (2007) 0.1% 2-4
Weitzman (2007a) 2% 2 2% 6%
Nordhaus (2008) 1% 2 2% 5%
*Decreasingwiththetimehorizon.**OMBusesadescriptiveapproach.
InTable3.2,theRamseyformulacanbeseentoyieldawiderangeofdiscountrates,althoughmost
oralloftheestimatesreflectdevelopedcountryexperience.FromthistableandBox3.5,arelative
consensusemergesinfavourof=0andbetween1and3,althoughtheyareprescriptive
parameters.ThismeansthatthenormativeRamseyruleleadstoarecommendationforasocial
discountrateofbetweenoneandthreetimestheestimatedgrowthrateinconsumptionbetween
todayandtherelevantsafebenefitorcosttobediscounted.Thesocialdiscountrateisnormative
becauseitreliesontheintensityofourcollectiveinequalityaversion.However,thepractical
coherenceofourethicalprinciplesrequiresthatifonehashighinequalityaversion,oneshouldalso
redistributewealthmoreassiduouslyfromthecurrentlyrichtothecurrentlypoor.Furthermore,itis
ultimatelyajudgementbythepolicymakerontheappropriatevalueoftheparametersofthe
Ramseyrule,andthusthesocialdiscountrate.
34of128

Thediscountratedescribedhereshouldbeusedtodiscountriskfreecostsandbenefits(Anthoffet
al.,2009).TheratesthatappearinTable3.2arehigherthanrealinterestratesobservedonfinancial
markets,asdocumentedin
Table3.1.Thisdiscrepancydefinestheriskfreeratepuzzle(Weil,1989).Therecentliteratureon
discountinghastriedtosolvethispuzzlebytakingintoaccounttheuncertaintysurrounding
economicgrowth.Prudentagentsshouldcaremoreaboutthefutureifthefutureismoreuncertain,
inlinewiththeconceptofsustainabledevelopment.Assumingarandomwalkforthegrowthrateof
consumptionpercapita,thisargumentappliedtoEquation3.6.4leadstoanextendedRamseyrule
inwhichanegativeprecautionaryeffectisadded:
Equation3.6.5.
t
=+g
t
0.5(+1)
t
2
where
t
istheannualizedvolatilityofthegrowthrateofGDP/cap,andg
t
isnowtheexpected
annualizedgrowthrateuntiltimehorizont.InTable3.3,wecalibratethisformulafordifferent
countriesbyusingtheestimationofthetrendandvolatilityparametersofobservedgrowthratesof
consumptionpercapitaovertheperiod19692010,using=2.WelearnfromthisTablethatthe
Ramseyrule(Equation3.4.1)oftenprovidesagoodapproximationofthesocialdiscountratetobe
appliedtoconsumption.Italsoshowsthatbecauseofdifferencesingrowthexpectations,nations
mayhavedifferentattitudestowardsreducingpresentconsumptionforthebenefitoffuture
generations.ThisisalsoafurthersourceofinternationaldisagreementonthestrengthofGHG
mitigationefforts.Theglobaldiscountrateforevaluatingglobalactionswillthereforedependon
howcostsandbenefitsareallocatedacrosscountries.
16
Table 3.3. Country-specific discount rate computed from the Ramsey rule (Equation 3.6.5) using the
historical mean g and standard deviation of growth rates of real GDP/cap 1969-2010, together with
o = u, and p = 2. (Source: Gollier, 2012)

Country g o
Discount rate
Ramsey rule Equation
3.6.4
Extended Ramsey rule
Equation 3.6.5
OECD
countries
United States
1.74% 2.11% 3.48% 3.35%
United Kingdom
1.86% 2.18% 3.72% 3.58%
Japan
2.34% 2.61% 4.68% 4.48%
Economies in
transition
China
7.60% 3.53% 15.20% 14.83%
India
3.34% 3.03% 6.68% 6.40%
Russia
1.54% 5.59% 3.08% 2.14%
Africa
Gabon
1.29% 9.63% 2.58% -0.20%
Zaire (RDC)
-2.76% 5.31% -5.52% -6.37%
Zambia
-0.69% 4.01% -1.38% -1.86%
Zimbabwe
-0.26% 6.50% -0.52% -1.79%
Aprudentsocietyshouldfavouractionsthatgeneratemorebenefitsforthegenerationsthatface
greateruncertainty,whichjustifiesadecreasingtermstructureforriskfreediscountrates(Gollier,
16
Table3.3isbasedontheassumptionthatthegrowthprocessisarandomwalk,sothattheaveragegrowth
rateconvergestoitsmeanintheverylongrun.Itwouldbemorerealistictorecognizethateconomicgrowth
hasamuchmoreuncertainnatureinthelongrun:shocksongrowthratesareoftenpersistent,economies
faceslongtermcyclesofuncertainlength,andsomeparametersofthegrowthprocessareuncertain.Because
thesephenomenagenerateapositivecorrelationinfutureannualgrowthrates,theytendtomagnifythe
uncertaintyaffectingthewellbeingofdistantgenerations,comparedtotherandomwalkhypothesisofthe
extendedRamseyrule(Equation3.6.5).
35of128

2012;Arrowetal.,2013;Weitzman,2013).TheseresultsarerelatedtotheliteratureonGamma
discounting(Weitzman,1998,2001,2010b;NewellandPizer,2003;GollierandWeitzman,2010).A
simpleguidelineemergingfromthisliteratureisthatthelongmaturitydiscountrateisequaltothe
smallestdiscountratecomputedfromEquation3.6.5withthedifferentplausiblelevelsofits
parameters.Forexample,assuming=2,ifthetrendofgrowthg
t
isunknownbutsomewhere
between1%and3%,adiscountratearound2xmean(1%,3%)=4%issociallydesirableintheshort
term,althoughadiscountrateofonly2xmin(1%,3%)=2%isdesirableforverylongmaturities.
Assumingaconstantrateofpurepreferenceforthepresent(actually=0),theserecommendations
yieldaperfectlytimeconsistentvaluationstrategy,althoughtheresultingdiscountratesdecrease
withmaturity.Atimeinconsistencyproblemarisesonlyifweassumethattherateofpure
preferenceforthepresentvariesaccordingtothetimehorizon.Economistshavetendedtofocuson
hyperbolicdiscountingandtimeinconsistency(Laibson,1997)andtheseparationbetweenrisk
aversionandconsumptionaversionfluctuationsovertime(EpsteinandZin,1991).SeeSection
3.10.1andChapter2.
Theliteraturedealsmainlywiththerateatwhichsafeprojectsshouldbediscounted.Inmostcases,
however,actionswithlonglastingimpactsarehighlyuncertain,somethingthatmustbetakeninto
accountintheirevaluation.Actionsthatreducetheaggregatedriskbornebyindividualsshouldbe
rewardedandthosethatincreaseriskshouldbepenalized.Thishastraditionallybeendoneby
raisingthediscountrateofaprojectbyariskpremium=
g
thatisequaltotheprojectspecificrisk
measuretimesaglobalriskpremium
g.
Theprojectspecificbetaisdefinedastheexpected
increaseinthebenefitoftheprojectwhentheconsumptionpercapitaincreasesby1%.Itmeasures
theadditionalriskthattheactionimposesonthecommunity.Onaverage,itshouldbearound1.As
weseefromTable3.3,theriskpremiumasmeasuredbythedifferencebetweentherateofreturn
onbondsandtherateofreturnonequityisbetween3%and6%.Amorenormativeapproach
describedbytheconsumptionbasedcapitalassetpricingmodel(Cochrane,2001)wouldleadtoa
muchsmallerriskpremiumequallingn
gt
= po
t
2
ifcalibratedonthevolatilityofgrowthinwestern
economies.
17
However,Barro(2006,2009)andMartin(2013)recentlyshowedthattheintroduction
ofrarecatastrophiceventssimilartothoseobservedinsomedevelopingcountriesduringthelast
centurycanjustifyusingalowsafediscountrateofaround1%andalargeaggregateriskpremium
ofaround4%atthesametime.Thetruediscountratetobeusedinthecontextofclimatechange
willthenrelyheavilyontheclimatebeta.Sofar,almostnoresearchhasbeenconductedonthe
valueoftheclimatebeta,thatis,thestatisticalrelationshipbetweenthelevelofclimatedamage
andthelevelofconsumptionpercapitainthefuture.TheexceptionisSandsmarkandVennemo
(2006),whosuggestthatitisalmostzero.ButexistingIntegratedAssessmentModels(IAMs)show
thatmoreclimatedamageisincurredinscenarioswithhighereconomicgrowth,suggestingthat
combatingclimatechangedoesnotprovideahedgeagainsttheglobalriskbornebyfuture
generations.Nordhaus(2011b)assumesthattheactualdamagesbornebyfuturegenerationsare
increasing,sothattheclimatebetaispositive,andthediscountrateforclimatechangeshouldbe
largerthanjustapplyingtheextendedRamseyrule.
Severalauthors(Malinvaud,1953;Guesnerie,2004;WeikardandZhu,2005;HoelandSterner,2007;
SternerandPersson,2008;Gollier,2010;Traeger,2011;Guantetal.,2012)emphasizetheneedto
takeintoaccounttheevolutionofrelativepricesinCBAsinvolvingthedistantfuture.Inagrowing
economy,nonreproduciblegoodslikeenvironmentalassetswillbecomerelativelyscarcerinthe
future,therebyimplyinganincreasingsocialvalue.
17
Withavolatilityinthegrowthrateofconsumptionpercapitaaroundo
t
=4%(seeTable3.3),andadegree
ofinequalityaversionof,p = 2,weobtainariskpremiumofonlyn
gt
= u.S2%.
36of128

3.6.3 Cobenefitsandadversesideeffects
Thissectiondefinestheconceptofcobenefitsandprovidesageneralframeworkforanalysisin
otherchapters(anegativecobenefitislabelledanadversesideeffect).Agoodexampleofaco
benefitintheliteratureisthereductionoflocalpollutantsresultingfromacarbonpolicythat
reducestheuseoffossilfuelsandfossilfuelrelatedlocalpollutants(seeSections5.7and6.6.2.1).It
isalsoimportanttodistinguishbetweencobenefitsandthesocietalwelfareconsequencesof
generatedcobenefits.Tousethesameexample,iflocalpollutantsarealreadyheavilyregulated,
thenthenetwelfarebenefitsoffurtherreductionsinlocalpollutantsmaybesmallorevennegative.
3.6.3.1 Ageneralframeworkforevaluationofcobenefitsandadversesideeffects
Asasimpleexample,supposesocialwelfareIisafunctionofdifferentgoodsorobjectivesz
(i = 1, , m),andthateachofthoseobjectivesmightbeinfluencedbysomepolicyinstrument,p
1
.
18
Thepolicymayhaveanimpactonseveralobjectivesatthesametime.Nowconsideramarginal
changeJp
1
inthepolicy.Thewelfareeffectisgivenby:
Equation3.6.6. JI =
v
z
m
=1
z
i
p
1
Jp
1
Forexample,supposeJp
1
>0isadditionalGHGabatement(tighteningthecaponCO
2
emissions).
Thenthedirectbenefitsofthatclimatepolicymightincludeeffectsonclimateobjectives,suchas
meanglobaltemperature(z
1
),sealevelrise(z
2
),agriculturalproductivity(z
3
),biodiversity(z
4
),
andhealtheffectsofglobalwarming(z
5
).Thecobenefitsofthatclimatepolicymightinclude
changesinasetofobjectivessuchasSO
2
emissions(z
6
),energysecurity(z
7
),laboursupplyand
employment(z
8
),thedistributionofincome(z
9
),thedegreeofurbansprawl(z
10
),andthe
sustainabilityofthegrowthofdevelopingcountries(z
11
).SeeTable15.1foranoverviewof
objectivesdiscussedinthesectorchaptersinthecontextofcobenefitsandadversesideeffects.
Thefewstudiesthatattemptafullevaluationoftheglobalwelfareeffectsofmitigationcobenefits
focusonlyonafewobjectivesbecauseofmethodologicalchallenges(asassessedinSection6.6).For
discussionofincomedistributionobjectives,seethesocialwelfarefunctionsinSection3.4.6.
Becausethisprobleminherentlyinvolvesmultipleobjectives,itcanbeanalysedusingMultiCriteria
Analysis(MCA)thatrequirespolicymakerstostateexplicitreasonsforchoosingpolicies,with
referencetothemultipleobjectivesthateachpolicyseekstoachieve(Dubashetal.,2013,p.47).
SeealsoSection3.7.2.1,Section6.6and(McCollumetal.,2012).
Evenexternaleffectsonpublichealthcouldturnouttobeeitherdirectbenefitsofclimatepolicyor
cobenefits.Thesocialcostofcarbonincludestheincreasedfutureincidenceofheatstroke,heart
attacks,malaria,andotherwarmclimatediseases.Anyreductioninsuchhealthrelatedcostsof
climatechangeisthereforeadirectbenefitofclimatepolicy.Thedefinitionofacobenefitislimited
totheeffectofreductionsinhealtheffectscausedbynonclimateimpactsofmitigationefforts.
Useoftheterminologyshouldbeclearandconsistent.CBAsneedtoincludeallgainsandlosses
fromtheclimatepolicybeinganalysedasshowninEquation3.6.6thesumofwelfareeffects
fromdirectbenefitsnetofcosts,plusthewelfareeffectsofcobenefitsandadversesideeffects.
Here,thecobenefitisdefinedastheeffectonanonclimateobjective(oz
op
1
),leavingaside
socialwelfare(notmultipliedbyoIoz
).Incontrast,thevalueofthecobenefitistheeffecton
socialwelfare(oIoz
),whichcouldbeevaluatedbyeconomistsusingvaluationmethodsdiscussed
elsewhereinthischapter.
19
Itmayrequireuseofasecondbestanalysisthataccountsformultiple
18
ThisVisalooseinterpretationofasocialwelfarefunction,suchasdefinedinEquation3.6.2,insofaras
welfareisnotusuallyrepresentedafunctionofpolicyobjectivesoraggregatequantitiesofgoods.
19
Wedistinguishherebetweenthewelfareeffectofthecobenefit(oIoz
)andthewelfareeffectofthe
policyoperatingthroughaparticularcobenefit(
v
z
i
z
i
p
1
Jp
1
).
37of128

marketdistortions(LipseyandLancaster,1956).Thisisnotaminorissue.Inparticular,oIoz
may
bepositiveornegative.
ThefullevaluationofJIintheequationaboveinvolvesfoursteps:first,identifythevarious
multipleobjectivesz
(i = 1, , m)(see,e.g.,Table4.8.1foraparticularclimatepolicysuchasaCO
2
emissionscap);second,identifyallsignificanteffectsonallthoseobjectives(directeffectsandco
effects
z
i
p
1
,fori = 1, , m)(seeChapters712);third,evaluateeacheffectonsocialwelfare
(multiplyeachoz
op
1
byoIoz
);andfourth,aggregatethemasinEquation3.6.6.Ofcourse,
computingsocialwelfarealsohasnormativedimensions(seeSection3.4.6).
3.6.3.2 Thevaluationofcobenefitsandadversesideeffects
Thelistofgoodsorobjectivesz
(i = 1, , m)couldincludeanycommodity,butsomeformulations
allowtheomissionofgoodssoldinmarketswithnomarketfailureordistortion,wherethesocial
marginalbenefit(alltotheconsumer)isequaltothesocialmarginalcost(allontheproducer).With
nodistortioninamarketforgoodi,asmallchangeinquantityhasnoneteffectonwelfare
(oIoz
= u).Theeffectonwelfareisnotzero,however,ifclimatepolicyaffectsthequantityofa
goodsoldinamarketwithamarketfailure,suchasnoncompetitivemarketpower,anexternality,
oranypreexistingtax.Ingeneral,eithermonopolypowerorataxwouldraisethepricepaidby
consumersrelativetothemarginalcostfacedbyproducers.Insuchcases,anyincreaseinthe
commoditywouldhaveasocialmarginalbenefithigherthansocialmarginalcost(anetgainin
welfare).
Wenowdescribeasetofstudiesthathaveevaluatedsomecobenefitsandadversesideeffects
(manymorestudiesarereviewedinSections5.7,7.9,8.7,9.7,10.8,11.7,12.8andsynthesizedin
Section6.6).First,oligopoliesmayexertmarketpowerandraisepricesabovemarginalcostinlarge
industriessuchasnaturalresourceextraction,ironandsteel,orcement.Andclimatepolicymay
affectthatmarketpower.Ryan(2012)findsthataprominentenvironmentalpolicyintheUnited
Statesactuallyincreasedthemarketpowerofincumbentcementmanufactures,becauseit
decreasedcompetitionfrompotentialentrantsthatfacedhighersunkcosts.Thatis,itcreated
barrierstoentry.Thateffectledtoasignificantlossinconsumersurplusthatwasnotincorporated
inthepolicysinitialbenefitcostanalysis.
Second,Renetal.(2011)pointoutthataclimatepolicytoreduceCO
2
emissionsmayincreasethe
useofbiofuels,butthatcornbasedethanolproductiondischargesnitrogenintothewater
environment[which]cancauserespiratoryproblemsininfantsandexacerbatealgaegrowth
andhypoxiainwaterbodies(p.498).Inotherwords,achangeinclimatepolicy(Jp
1
)affectsthe
useofnitrogenfertilizeranditsrunoff(oz
op
1
).Theeffectisanadversesideeffect.Ifnitrogen
runoffregulationislessthanoptimal,theeffectonsocialwelfareisnegative(oIoz
<0).
Third,arguablythemoststudiedcobenefitsofclimatepolicyaretheeffectsonlocalairpollutant
emissions,airquality,andhealtheffectsofgroundlevelozone(seeSection6.6forasynthesisof
findingsfromscenarioliteratureandsectorspecificmeasures).Burtrawetal.(2003)concludethata
USD25pertonnecarbontaxintheUnitedStateswouldreduceNO
X
emissionsandtherebyprovide
healthimprovements.Further,theresearchersvaluedthesehealthcobenefitsatUSD
1997
8(USD
2010
10,50)pertonneofcarbonreductionintheyear2010.Morerecently,Groosmanetal.(2011)model
aspecificU.S.climatepolicyproposal(WarnerLieberman(S.2191)).Theycalculateeffectsonhealth
fromchangesinlocalflowpollutants(acobenefit).Thesehealthcobenefitsmainlycomefrom
reductionsinparticulatesandozone,attributabletoreductionsinuseofcoalfiredpowerplants
(Burtrawetal.,2003;Groosmanetal.,2011).
20
TheauthorsalsovaluethatcobenefitatUSD
2006
103
20
Bothofthecitedstudiesestimatethedollarvalueofhealthimprovements,butthesearegrossbenefits
thatmayormaynotcorrectlyaccountfortheoffsettingeffectsofexistingcontrolsontheselocalpollution
emissions,whichisnecessarytodeterminethenetwelfareeffects.
38of128

billiontoUSD
2006
1.2trillion(USD
2010
111billiontoUSD
2010
1,3billion)fortheyears20102030.That
totalamountcorrespondstoUSD1toUSD77pertonneofCO
2
(dependingonmodelassumptions
andyear;seeSection5.7forareviewofabroadersetofstudieswithhighervaluesparticularlyfor
developingcountries).
Researchershavecalculatedclimatepolicycobenefitsinmanyothercountries;forinstance,
Sweden(Riekkolaetal.,2011),China(Aunanetal.,2004),andChile(DessusandOConnor,2003).
Acompleteanalysisofclimatepolicywouldmeasureallsuchdirectorsideeffects(oz
op
1
)while
recognizingthatothermarketsmaybefunctioningproperlyorbepartiallyregulated(foroptimal
regulation,oIoz
=0).IftheexternalityfromSO
2
isalreadypartlycorrectedbyataxorpermit
pricethatislessthanthemarginalenvironmentaldamage(MED)ofSO
2
,forexample,thenthe
welfaregainfromasmallreductioninSO
2
maybelessthanitsMED.Or,ifthepricepertonneofSO
2
isequaltoitsMED,andclimatepolicycausesasmallreductioninSO
2
,thenthesocialvalueofthat
cobenefitiszero.
21
Similarly,ifthelabourmarketisfunctioningproperlywithnoinvoluntary
unemployment,thenclimatepolicymayhavedirectcostsfromuseofthatlabourbutnowelfare
gainfromchangesinemployment.Inotherwords,inmeasuringthewelfareeffectsofcobenefits,it
isnotgenerallyappropriatesimplytousethegrossmarginalvalueassociatedwithacobenefit.
Inthecontextofexternalitiesandtaxes,thispointcanbeformalizedbythefollowingextensionof
FullertonandMetcalf(2001):
Equation3.6.7. dV= (t
|
-
|
)
m
|=1
0z
|
0p
1
dp
1
Ontherightsideoftheequation,p
istheMEDfromthei
th
commodity;andt
isitstaxrate(or
permitprice,ortheeffectofamandatethatmakesaninputsuchasemissionsmorecostly).The
effectofeachgoodonwelfare(oIoz
inEquation3.6.6above)isreducedinthismodeltojust
(t
-p
).Theintuitionissimple:t
isthebuyerssocialmarginalbenefitminusthesellerscost;the
externalityp
isthesocialmarginalcostminusthesellerscost.Therefore,(t
-p
)isthesocial
marginalbenefitminussocialmarginalcost.Itistheneteffectonwelfarefromachangeinthat
commodity.Ifeveryexternalityp
iscorrectedbyataxrateorpriceexactlyequaltop
,thenthe
outcomeisfirstbest.Inthatcase,dVinEquation3.6.7isequaltozero,whichmeanswelfare
cannotbeimprovedbyanychangeinanypolicy.Ifanyt
isnotequaltop
,however,thenthe
outcomeisnotoptimal,andasecondbestpolicymightimprovewelfareifithasanydirector
indirecteffectontheamountofthatgood.
AlthoughthemodelunderlyingEquation3.6.7isstaticandclimatechangeisinherentlydynamic,the
conceptsrepresentedinthestaticmodelcanbeusedtounderstandtheapplicationtoclimate.
Climatepolicyreducescarbonemissions,butEquation3.6.7showsthatthisdirecteffectdoesnot
addtosocialwelfareunlessthedamagepertonneofcarbon(p
C
)exceedsthetaxoncarbon(t
C
).
ThesocialcostofcarbonisdiscussedinSection3.9.4.Toseeacobenefitinthisequation,suppose
z
S
isthequantityofSO
2
emissions,t
S
isthetaxpertonne,andp
S
istheMEDofadditionalSO
2
.Ifthe
taxonSO
2
istoosmalltocorrectfortheexternality(t
S
- p
S
< u),thenthemarketprovidestoo
muchofit,andanypolicysuchasacarbontaxthatreducestheamountofSO
2
(oz
S
op
1
< u)
wouldincreaseeconomicwelfare.Theequationsumsoverallsucheffectsinallmarketsforallother
inputs,outputs,andpollutants.
Ifthoselocalpollutionexternalitiesarealreadycompletelycorrectedbyataxorotherpolicy
(t
S
= p
S
),however,thenareductioninSO
2
addsnothingtowelfare.Theexistingpolicyraisesthe
firmscostofSO
2
emissionsbyexactlytheMED.Thatfirmsconsumersreapthefullsocialmarginal
benefitpertonneofSO
2
throughconsumptionoftheoutput,butthoseconsumersalsopaythefull
21
ThismarginalanalysiscontemplatesasmallchangeineitherCO
2
orSO
2
.Ifeitherofthosechangesislarge,
however,thentheanalysisissomewhatdifferent.
39of128

socialmarginalcostpertonneofSO
2
.Inthatcase,oneadditionaltonneofSO
2
hassocialcosts
exactlyequaltosocialbenefits,soanysmallincreaseordecreaseinSO
2
emissionscausedbyclimate
policyprovidesnonetsocialgain.Infact,ift
S
> p
S
,thenthoseemissionsarealreadyover
corrected,andanydecreaseinSO
2
wouldreducewelfare.
3.6.3.3 Thedoubledividendhypothesis
Anothergoodexampleofacobenefitarisesfromtheinteractionbetweencarbonpoliciesandother
policies(Parry,1997;ParryandWilliams,1999).ThoughenactedtoreduceGHGemissions,aclimate
policymayalsoraiseproductpricesandthusinteractwithothertaxesthatalsoraiseproductprices.
Sincetheexcessburdenoftaxationrisesmorethanproportionatelywiththesizeoftheoverall
effectivemarginaltaxrate,thecarbonpolicysadditiontoexcessburdenmaybemuchlargerifitis
addedintoasystemwithhightaxesonoutputorinputs.
Thislogichasgivenrisetothedoubledividendhypothesisthatanemissionstaxcanbothimprove
theenvironmentandproviderevenuetoreduceotherdistortingtaxesandthusimproveefficiency
ofthetaxsystem(e.g.,OatesandSchwab,1988;Pearce,1991;Parry,1995;Stern,2009).
22
Parry
(1997)andGoulderetal.(1997)concludethattheimplementationofacarbontaxoremissions
tradingcanincreasethedeadweightlossofpreexistinglabourtaxdistortions(thetaxinteraction
effect),butrevenuecanbeusedtooffsetdistortionarytaxes(therevenuerecyclingeffect).Parry
andWilliams(1999)investigatetheimpactsofexistingtaxdistortionsinthelabourmarketforeight
climatepolicyinstruments(includingenergytaxesandperformancestandards)fortheUnitedStates
in1995.Theyconcludethatpreexistingtaxdistortionsraisethecostsofallabatementpolicies,so
thecobenefitsofcarbontaxesoremissionstradingdependonwhethergeneratedrevenuescanbe
directedtoreduceotherdistortionarytaxes.Alessonisthatforgoingrevenueraisingopportunities
fromaGHGregulationcansignificantlyincreaseinefficiencies.TheEuropeanUnionisauctioningan
increasingshareofpermitswithrevenuegoingtoMemberStates(see14.4.2).Australiaisusinga
largeshareofcarbonpricingrevenuetoreduceincometax(Jotzo,2012).
Toputthisdiscussionintothecontextofcobenefits,notethatFullertonandMetcalf(2001)use
theirversionofEquation3.6.7toconsiderlabour(z
L
),taxedatapreexistingratet
L
(withmarginal
externaldamagesofzero,sop
L
= u).Supposetheonlyotherdistortionisfromcarbonemissions
(z
C
),withMEDofp
C
.Thustheeconomyhastoolittlelaboursupply,andtoomuchpollution.The
combinationpolicychangeisasmallcarbontaxwithrevenueusedtocutthetaxratet
L
.Other
taxesanddamagesarezero(t
= p
= u)forallgoodsotherthanz
L
andz
C
.Thus,Equation3.6.7
abovesimplifiesfurther,toshowthatthetwokeyoutcomesarejusttheneteffectonpollution
(Jz
C
)andtheneteffectonlabour(Jz
L
):
Equation3.6.8. dV= t
L
Jz
L
+ (t
C
-p
C
)Jz
C
Therefore,anincreaseinthecarbontaxthatreducesemissions(Jz
C
< u)hasadirectbenefitof
increasedeconomicwelfarethroughthesecondterm,butonlytotheextentthatemissions
damagesexceedthetaxrate(p
C
> t
C
).Ifthelabourtaxcutincreaseslaboursupply,thenthefirst
termalsoincreaseswelfare(adoubledividend).Butthecarbontaxalsoraisesthecostofproduction
andtheequilibriumoutputprice,whichitselfreducestherealnetwage(thetaxinteractioneffect).
Ifthateffectdominatesthereductioninthelabourtaxrate(fromtherevenuerecyclingeffect),then
laboursupplymayfall(Jz
L
< u).Inthatcase,thefirsttermhasanegativeeffectonwellbeing.In
otherwords,thedoubledividendispossibleundersomecircumstancesandnotothers.Ifthe
22
Theliteraturecontainstwoversionsofthedoubledividendhypothesis.Astrongversionsaysthat
efficiencygainsfromdiminishingdistortionarytaxescanmorethancompensatethecostsofpollutiontaxes.
Anotherweakversionsaysthatthosegainscompensateonlypartofthecostsofpollutiontaxes(Goulder,
1995).
40of128

revenueisnotusedtocutthelabourtaxrate,thentherealnetwagedoesfall,andthelaboursupply
mayfall.
3.7 Assessingmethodsofpolicychoice
SpecificclimatepoliciesarediscussedinSection3.8;inthissection,wediscussmethodsfor
evaluatingtherelativemeritsofdifferentpolicies.SeealsoAlkin(2004),PawsonandTilley(1997),
Bardach(2005),Majchrzak(1984),Scriven(1991)Rossietal.(2005),andChen(1990).Thedesign
andchoiceofaspecificclimatepolicyinstrument(ormixofinstruments)dependsonmany
economic,social,cultural,ethical,institutional,andpoliticalcontexts.Differentmethodsforexante
andexpostanalysisareavailableanddifferenttypesofanalyticalapproachesmaybeusedin
tandemtoprovideperspectivestopolicymakers.
3.7.1 Policyobjectivesandevaluationcriteria
InadditiontoreducingGHGemissions,climatepolicymayhaveotherobjectives.FollowingAR4
(Guptaetal.,2007),theseobjectivesareorganizedbelowinfourbroadcategories:economic,
distributional/fairness,environmental,andinstitutional/politicalfeasibility.
23
Therelative
importanceofthesepolicyobjectivesdiffersamongcountries,especiallybetweendevelopedand
developingcountries.
Inthissectionwediscusselementsofthesefourcategoriesandexpandonrecentpolicyevaluation
studies(e.g.,OpschoorandTurner,1994;Ostrom,1999;FaureandSkogh,2003;Sterner,2003;
Mickwitz,2003;Blok,2007),leavingdetailsofapplicationsandevidencetoChapters811and13
15.
ThebasiceconomicframeworkforpolicyanalysisisdepictedinFigure3.3(adaptedfromFullerton
(2011)).Thisdiagramillustratesboththeimpactsofpoliciesandthecriteriaforevaluatingthemin
thecontextoftheproductionofapollutinggood(i.e.,emissionsassociatedwithproducingagood).
Thefocusisstylized,butwenotethatmanynoneconomicvaluescanstillbeincorporated,tothe
extentthatvaluescanbeplacedonotherconsiderations,suchaseffectsonnature,culture,
biodiversityanddignity(seeSections3.4.1and3.4.2).
AsshowninFigure3.3,thequantityofGHGemissionsfromproducingagood,suchaselectricity,is
shownonthehorizontalaxis,andthepriceorcostperunitofthatgoodisshownontheverticalaxis.
Thedemandfortheemissionsisderivedfromthedemandforelectricity,asshownbythecurve
calledPrivateMarginalBenefit(PMB).TheprivatemarketsupplycurveisthePrivateMarginalCost
(PMC)ofproduction,andsotheunfetteredequilibriumquantitywouldbeQ
0
atequilibriumpriceP
0
.
Thispollutingactivitygeneratesexternalcosts,however,andsoeachunitofoutputhasaSocial
MarginalCost(SMC)measuredbytheverticalsumofPMCplusMarginalExternalCost(MEC).With
noexternalitiesonthedemandside,PMB=SMB.
23
Politicalfactorshaveoftenbeenmoreimportantthaneconomicfactorsinexplaininginstrumentchoice
(Hepburn,2006).RedistributiontolowincomehouseholdsisanimportantfeatureinAustraliasemissions
pricingpolicy(JotzoandHatfieldDodds,2011).
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Figure 3.3. A partial equilibrium model of the costs and benefits of a market output, assuming perfect
competition, perfect information, perfect mobility, full employment, and many identical consumers (so
all individuals equally benefit from production and they equally bear the external cost of pollution).
Underthestatedsimplifyingassumptions,thesocialoptimumiswhereSMC=PMB,atQ.Thefirst
pointhere,then,isthattheoptimalquantitycanbeachievedbyseveraldifferentpoliciesunder
thesesimpleconditions.AsimpleregulatoryquotacouldrestrictoutputfromQ
0
toQ,orafixed
numberoftradeablepermitscouldrestrictpollutiontothequantityQ.Inthatcase,P
n
isthe
equilibriumpricenetofpermitcost(thepricereceivedbythefirm),whileP
g
isthepricegrossof
permitcost(paidbytheconsumer).Thepermitpriceisthedifference,P
g
P
n
.Alternatively,ataxof
(P
g
P
n
)perunitofpollutionwouldraisethefirmscosttoSMCandresultinequilibriumquantityQ.
ThediagraminFigure3.3willbeusedbelowtoshowhowtheequivalenceoftheseinstruments
breaksdownundermoregeneralcircumstances,aswellasgainsandlossestovariousgroups.In
otherwords,weusethisdiagramtodiscusseconomicaswellasdistributional,otherenvironmental
andculturalobjectives,andinstitutional/politicalfeasibility.
3.7.1.1 Economicobjectives
Economicefficiency.Consideraneconomy'sallocationofresources(goods,services,inputs,and
productiveactivities).Anallocationisefficientifitisnotpossibletoreallocateresourcessoasto
makeatleastonepersonbetteroffwithoutmakingsomeoneelseworseoff.Thisisalsoknownas
theParetocriterionforefficiency(discussedinSection3.6.1)(seee.g.,Sterner,2003;Harringtonet
al.,2004;Tietenberg,2006).InFigure3.3,anyreductioninoutputfromQ
0
improvesefficiency
becauseitsavescosts(heightofSMC)thatexceedthebenefitsofthatoutput(heightofPMB).
24
This
reductioncanbeachievedbyataxleviedontheexternality(acarbontax),orbytradeableemission
permits.Furtherreductionsinoutputgeneratefurthernetgains,bytheextenttowhichSMC
exceedsSMB,untiloutputisreducedtoQ(whereSMC=SMB).Hence,thegainineconomic
efficiencyisareaC.Perfectefficiencyisdifficulttoachieve,forpracticalreasons,butinitialsteps
fromQ
0
achievealargergain(SMC>SMB)thanthelaststeptoQ(becauseSMCSMBneartheleft
pointoftriangleC).
24
OtherapproachesarediscussedinSection3.11.
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Anaspectofeconomicefficiencyovertimeistheextenttowhichacarbonpolicyencouragesthe
rightamountofinvestmentinresearch,innovation,andtechnologicalchange,inordertoreduce
GHGemissionsmorecheaply(Jungetal.,1996;MundacaandNeij,2009).SeeSection3.11.
Costeffectiveness.PollutionperunitofoutputinFigure3.3isfixed,butactualtechnologiesprovide
differentwaysofreducingpollutionperunitofoutput.Apolicyiscosteffectiveifitreduces
pollution(givenaclimatetarget)atlowestcost.Animportantconditionofcosteffectivenessisthat
marginalcompliancecostsshouldbeequalamongparties(ignoringotherdistortionssuchas
regulations)(Babikeretal.,2004).
Transactioncosts.Inadditiontothepricepaidorreceived,marketactorsfaceothercostsin
initiatingandcompletingtransactions.Thesecostsaltertheperformanceandrelativeeffectiveness
ofdifferentpoliciesandneedtobeconsideredintheirdesign,implementation,andassessment
(Mundacaetal.,2013;seealsoMatthews,1986,p.906).
3.7.1.2 Distributionalobjectives
Sixdistributionaleffects.Apolicymaygenerategainstosomeandlossestoothers.Thefairnessor
overallwelfareconsequencesofthesedistributionaleffectsisimportanttomanypeopleandcanbe
evaluatedusingaSWF,asdiscussedinSection3.4.6.Theseeffectsfallintosixcategories
(Fullerton,2011),andareillustratedinBox3.6below.InFigure3.3,anypolicyinstrumentmight
reducethequantityofpollutingoutput,suchasfromQ
0
toQ,whichreducesemissions,raisesthe
equilibriumpricepaidbyconsumers(fromP
0
toP
g
),andreducesthepricereceivedbyfirms(fromP
0
toP
n
).ThesixeffectsareillustratedinBox3.6.Theframeworkcanbeappliedtoanyenvironmental
problemandanypolicytocorrectit.
Box 3.6 Six distributional effects of climate policy, illustrated for a permit obligation or emissions tax
on coal-fired electricity, under the assumption of perfectly competitive electricity markets.
First,thepolicyraisesthecostofgeneratingelectricityandifcostincreasesarepassedthroughto
consumers,forexamplethroughcompetitivemarketsorchangesinregulatedprices,theconsumers
priceincreases(fromP
0
toP
g
),soitreducesconsumersurplus.InFigure3.3,thelosstoconsumersis
thesumofareasA+D.Lossesaregreaterforthosewhospendmoreonelectricity.
Second,thepolicyreducesthenetpricereceivedbythefirm(fromP
0
toP
n
),soitreducesproducer
surplusbythesumofareasB+E.Theeffectisreducedpaymentstofactorsofproduction,suchas
labourandcapital.Lossesaregreaterforthosewhoreceivemoreincomefromthedisplacedfactor.
Third,pollutionandoutputarerestricted,sothepolicygeneratesscarcityrentssuchasthevalueof
arestrictednumberofpermits(areasA+B).Ifthepermitsaregiventofirms,theserentsaccrueto
shareholders.Thegovernmentcouldpartlyorfullycapturetherentsbysellingthepermitsorbya
taxperunitofemissions(FullertonandMetcalf,2001).
Fourth,becausethepolicyrestrictsGHGemissions,itconfersbenefitsonthosewhowould
otherwisesufferfromclimatechange.ThevalueofthosebenefitsisareasC+D+E.
Fifth,theelectricitysectoruseslesslabour,capitalandotherresources.Itnolongerpaysthem
(areasE+F).Withperfectmobility,thesefactorsareimmediatelyredeployedelsewhere,withno
loss.Inpracticehowever,socialcostsmaybesubstantial,includingtransactioncostsofshiftingto
otherindustriesorregions,transitionalorpermanentunemployment,andsocialandpsychological
displacement.
Sixth,anygainorlossdescribedabovecanbecapitalizedintoassetprices,withsubstantial
immediateeffectsforcurrentowners.Forexample,thevalueofacorporationthatownscoalfired
generationassetsmayfall,inlinewiththeexpectedpresentvalueofthepolicychange,whilethe
valueofcorporationsthatownlowemissionsgenerationtechnologiesmayrise.
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Theconnectionbetweenthesedistributionaleffectsandeconomicefficiencyisrevealedbyadding
upallthegainsandlossesjustdescribed:theconsumersurpluslossisA+D;producersurpluslossis
B+E;thegaininscarcityrentsisA+B;andtheenvironmentalgainisC+D+E,assumingthegainersand
losersreceiveequalweights.ThenetsumofthegainsandlossesisareaC,describedaboveasthe
netgainineconomicefficiency.
Inmanycases,adistributionalimplicationofimposingefficientexternalitypricing(e.g.,areaA+B)is
muchlargerthantheefficiencygains(areaC).Thisillustratestheimportanceofdistributional
considerationsindiscussionsonemissionsreducingpolicies,anditindicateswhydistributional
considerationsoftenloomlargeindebatesaboutclimatepolicy.
WithreferencetoBox3.6,thefirsteffectofacarbonpolicyonconsumersisgenerallyregressive
(thoughmostanalysesarefordevelopedcountries),becausethehigherpriceofelectricityimposesa
heavierburdenonlowerincomegroupswhospendmoreoftheirincomeonelectricity(Metcalf,
1999;GraingerandKolstad,2010).However,fueltaxestendtobeprogressiveindeveloping
countries(Sterner,2011).Thesignofthesecondeffect,onfactorsofproduction,isgenerally
ambiguous.Thethirdeffectisregressiveifpermitsaregiventofirms,becausethenprofitsaccrueto
shareholderswhotendtobeinhighincomebrackets(Parry,2004).Butifgovernmentcapturesthe
scarcityrentsbysellingpermitsorthroughacarbontax,thefundscanbeusedtooffsetburdenson
lowincomeconsumersandmaketheoveralleffectprogressiveinsteadofregressive.Othereffects
arequitedifficulttomeasure.
Muchoftheliteratureonenvironmentaljusticediscussesthepotentialeffectsofapollutionpolicy
onneighbourhoodswithresidentsfromdifferentincomeorethnicgroups(Siegetal.,2004).Climate
policiesaffectbothGHGemissionsandotherlocalpollutantssuchasSO
2
orNO
X
,whose
concentrationsvarywidely.Furthermore,thecostofmitigationmaynotbesharedequallyamongall
incomeorethnicgroups.Andevenglobalclimatechangecanhavedifferenttemperatureimpacts
ondifferentareas,orotherdifferentialeffects(e.g.,oncoastalareasviariseinsealevel).
Thedistributionalimpactsofpoliciesincludeaspectssuchasfairness/equity(Guptaetal.,2007).A
perceivedunfairdistributionofcostsandbenefitscouldprovepoliticallychallenging(seebelow),
sinceefficiencymaybegainedattheexpenseofequityobjectives.
3.7.1.3 Environmentalobjectives
Environmentaleffectiveness.Apolicyisenvironmentallyeffectiveifitachievesitsexpected
environmentaltarget(e.g.,GHGemissionreduction).Thesimplepoliciesmentionedabovemightbe
equallyeffectiveinreducingpollution(fromQ
0
toQinFigure3.3),butactualpoliciesdifferinterms
ofambitionlevels,enforcementandcompliance.
Cobenefits.ClimatepolicymayreducebothGHGemissionsandlocalpollutants,suchasSO
2
emissionsthatcauseacidrain,orNO
X
emissionsthatcontributetogroundlevelozone.Asdescribed
inSection3.6.3,reductionsinotherpollutantsmaynotyieldanynetgaintosocietyiftheyare
alreadyoptimallyregulated(wheretheirmarginalabatementcostsandtheirmarginaldamagesare
equal).Ifpollutantsareinefficientlyregulated,however,climateregulationscanyieldpositiveor
negativenetsocialgainsbyreducingthem.
Climatepolicyisalsolikelytoaffectothernationalobjectives,suchasenergysecurity.Forcountries
thatwanttoreducetheirdependenceonimportedfossilfuels,climatepolicycanbolsterenergy
efficiencyandthedomesticrenewableenergysupply,whilecuttingGHGemissions.SeeSection
3.6.3oncobenefits.
Carbonleakage.Theeffectivenessofanationalpolicytoreduceemissionscanbeunderminedifit
resultsinincreasedemissionsinothercountries,forexample,becauseoftradingadvantagesin
countrieswithmorerelaxedpolicies(seeSection3.9.5).Anothertypeofleakageoccurswithin
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emissiontradingsystems.Unilateralemissionreductionsbyonepartywillreleaseemissionpermits
andbeoutweighedbynewemissionswithinthetradingregime.
3.7.1.4 Institutionalandpoliticalfeasibility
Administrativeburden.Thisdependsonhowapolicyisimplemented,monitored,andenforced
(NordhausandDanish,2003).Thesizeoftheburdenreflects,interalia,theinstitutionalframework,
humanandfinancialcostsandpolicyobjectives(NordhausandDanish,2003;Mundacaetal.,2010).
Administrativecostsinpublicpolicyareoftenoverlooked(Tietenberg,2006)
Politicalfeasibilityisthelikelihoodofapolicygainingacceptanceandbeingadoptedand
implemented(Guptaetal.,2007,p.785).Itcoverstheobstaclesfacedandkeydesignfeaturesthat
cangenerateorreduceresistanceamongpoliticalparties(NordhausandDanish,2003).Political
feasibilitymayalsodependonenvironmentaleffectivenessandwhetherregulatoryandothercosts
areequitablydistributedacrosssociety(Rist,1998).Theabilityofgovernmentstoimplement
politicaldecisionsmaybehamperedbyinterestgroups;policieswillbemorefeasibleifthebenefits
canbeusedtobuythesupportofawinningcoalition(Compston,2010).Exante,thesecriteriacan
beusedinassessingandimprovingpolicies.Expost,theycanbeusedtoverifyresults,withdraw
inefficientpoliciesandcorrectpolicyperformance.Forspecificapplications,seeChapters7-15.
3.7.2 Analyticalmethodsfordecisionsupport
PreviousIPCCAssessmentReportshaveaddressedanalyticalmethodstosupportdecisionmaking,
includingbothnumericalandcasebasedmethods.Bruceetal.(1996,chap.2and10)focusheavily
onquantitativemethodsandIAMs.Metzetal.(2001)provideawiderreviewofapproaches,
includingemergingparticipatoryformsofdecisionmaking.Metzetal.(2007)brieflyelaborateon
quantitativemethodsandlistsociologicalanalyticalframeworks.Inthissection,wesummarizethe
coreinformationonmethodologiesseparatedintoquantitativeandqualitativeoriented
approaches.
3.7.2.1 Quantitativeorientedapproaches
Indecisionmaking,quantitativemethodscanbeusedtoorganizeandmanagenumerical
information,providestructuredanalyticalframeworks,andgeneratealternativescenarioswith
differentlevelsofuncertainty(Majchrzak,1984).Anapproachthatattemptstoestimateand
aggregatemonetizedvaluesofallcostsandbenefitsthatcouldresultfromapolicyisCBA.Itmay
requireestimatingnonmarketvalues,andchoosingadiscountratetoexpressallcostsandbenefits
inpresentvalue.Whenbenefitsaredifficulttoestimateinmonetaryterms,aCostEffectiveness
Analysis(CEA)maybepreferable.ACEAcanbeusedtocomparethecostsofdifferentpolicyoptions
(Tietenberg,2006)forachievingawelldefinedgoal.Itcanalsoestimateandidentifythelowest
possiblecompliancecosts,therebygeneratingarankingofpolicyalternatives(LevinandMcEwan,
2001).BothCEAandCBAaresimilarlylimitedintheirabilitytogeneratedata,measureandvalue
futureintangiblecosts.
VarioustypesofmodelcanprovideinformationforCBA,includingenergyeconomyenvironment
modelsthatstudyenergysystemsandtransitionstowardsmoresustainabletechnology.Acommon
classificationofmodelmethodologiesincludesbottomupandtopdownapproaches.Hybridsof
thetwocancompensateforsomeknownlimitationsandinherentuncertainties(RiversandJaccard,
2006):
25
25
Theliteratureacknowledgesthatitisdifficulttomakeaclearclassificationamongmodellingapproaches,as
variationsamongcategoriesandalsoalternativesimulationmethodologiesdoexist(e.g.,macroeconometric
Keynesianmodels,agentbasedapproaches)(Hourcadeetal.,2006;Mundacaetal.,2010;Scrieciuetal.,
2013).
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- Givenexogenouslydefinedmacroeconomicanddemographicscenarios,bottomupmodelscan
providedetailedrepresentationsofsupplyanddemandsidetechnologypathsthatcombine
bothcostandperformancedata.Conventionalbottomupmodelsmaylackarealistic
representationofbehaviour(e.g.,heterogeneity)andmayoverlookcriticalmarket
imperfections,suchastransactioncostsandinformationasymmetries(e.g.,Craigetal.,2002;
DeCanio,2003;GreeningandBernow,2004).
- Bycontrast,topdownmodels,suchascomputablegeneralequilibrium(CGE),represent
technologyandbehaviourusinganaggregateproductionfunctionforeachsectortoanalyze
effectsofpoliciesoneconomicgrowth,trade,employment,andpublicrevenues(see,e.g.,
DeCanio,2003).Theyareoftencalibratedonrealdatafromtheeconomy.However,such
modelsmaynotrepresentallmarkets,allseparatepolicies,alltechnologicalflexibility,andall
marketimperfections(Laitneretal.,2003).Parametersareestimatedfromhistoricaldata,so
forecastsmaynotpredictafuturethatisfundamentallydifferentfrompastexperience(i.e.,
pathdependency)(Scheraga,1994;Hourcadeetal.,2006).Forpotentialtechnologychange,
manymodelsusesubmodelsofspecificsupplyorendusedevicesbasedonengineeringdata
(Jacobyetal.,2006;RichelsandBlanford,2008;Lkenetal.,2011;Karplusetal.,2013).
WithCBA,itisdifficulttoreduceallsocialobjectivestoasinglemetric.Oneapproachtodealingwith
themultipleevaluationcriteriaisMultiCriteriaAnalysis,orMCA(KeeneyandRaiffa,1993;Greening
andBernow,2004).Somearguethatanalyzingenvironmentalandenergypoliciesisamulticriteria
problem,involvingnumerousdecisionmakerswithdiverseobjectivesandlevelsofunderstandingof
thescienceandcomplexityofanalyticaltools(Sterner,2003;GreeningandBernow,2004).The
advantageofMCAisthattheanalystdoesnothavetodeterminehowoutcomesaretradedoffby
thepolicymaker.Forinstance,costscanbeseparatedfromecosystemlosses.ButevenwithMCA,
onemustultimatelydeterminetheappropriatetradeoffratesamongthedifferentobjectives.
Nevertheless,itcanbeausefulwayofanalyzingproblemswherebeingrestrictedtoonemetricis
problematic,eitherpoliticallyorpractically.CGEmodelscanspecifyconsumerandproducer
behaviourandsimulateeffectsofclimatepolicyonvariousoutcomes,includingrealgainsand
lossestodifferentgroups(e.g.,householdsthatdifferinincome,regionordemographic
characteristics).Withbehaviouralreactions,directburdensareshiftedfromonetaxpayertoanother
throughchangesinpricespaidforvariousoutputsandreceivedforvariousinputs.Asignificant
challengeisthedefinitionofawelfarebaseline(i.e.,identifyingeachwelfarelevelwithouta
specificpolicy).
IntegratedAssessmentModels(IAMs)orsimplyIntegratedModels(IAs)combinesomeorallofthe
relevantcomponentsnecessarytoevaluatetheconsequencesofmitigationpoliciesoneconomic
activity,theglobalclimate,theimpactsofassociatedclimatechange,andtherelevanceofthat
changetopeople,societies,andeconomies.Somemodelsmayonlybeabletorepresenthowthe
economyrespondstomitigationpolicyandnomore;somemodelsmayincludeaphysicalmodelof
theclimateandbeabletotranslatechangesinemissionsintochangesinglobaltemperature;some
modelsmayalsoincludearepresentationoftheimpactsofclimatechange;andsomemodelsmay
translatethoseimpactsintodamagetosocietyandeconomies.Modelscanbehighlyaggregate(top
down)ordetailedprocessanalysismodels(bottomup),oracombinationofboth(seealsoChapter
6).SomeIAMsrelateclimatechangevariableswithotherphysicalandbiologicalvariableslikecrop
yield,foodprices,prematuredeath,floodingordroughtevents,orlandusechange(Reillyetal.,
2013).Computationallimitsmayprecludethescalesrequiredforsomeclimateprocesses(Donner
andLarge,2008),
26
butrecentattemptsaredirectedtowardsintegratinghumanactivitieswithfull
EarthSystemmodels(Jonesetal.,2013).AllofthemodelsusedinWGIII(primarilyChapter6)focus
26
Stantonetal.(2009)alsoplaceclimatechangemodelsintocategories(welfaremaximization,general
equilibrium,partialequilibrium,costminimization,andsimulationmodels).
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onhowmitigationpoliciestranslateintoemissions;noneofthosemodelshavearepresentationof
climatedamages.IAMshavebeencriticizedinrecentyears(e.g.,Ackermanetal.,2009;Pindyck,
2013).Muchofthemostrecentcriticismisdirectedatmodelsthatincludearepresentationof
climatedamage;noneofthemodelsusedinChapter6fallintothiscategory.RefertoChapter6for
moredetailinthisregard.
Otherquantitativeorientedapproachestosupportpolicyevaluationincludetolerablewindows
(Bruckneretal.,1999),safelanding/guardrail(AlcamoandKreileman,1996),andportfoliotheory
(Howarth,1996).Outsideeconomics,thosewhostudydecisionsciencesemphasizetheimportance
offacingdifficultvaluebasedtradeoffsacrossobjectives,andtherelevanceofvarioustechniques
tohelpstakeholdersaddresstradeoffs(see,e.g.,KeeneyandRaiffa,1993).
3.7.2.2 Qualitativeapproaches
Variousqualitativepolicyevaluationapproachesfocusonthesocial,ethical,andculturaldimensions
ofclimatepolicy.Theysometimescomplementquantitativeapproachesbyconsideringcontextual
differences,multipledecisionmakers,boundedrationality,informationasymmetries,andpolitical
andnegotiationprocesses(Tothetal.,2001;Halsnsetal.,2007).Sociologicalanalytical
approachesexaminehumanbehaviourandclimatechange(Blumer,1956),includingbeliefs,
attitudes,values,norms,andsocialstructures(RosaandDietz,1998).Focusgroupscancapturethe
factthatpeopleoftenneedtolistentoothersopinionsandunderstandingstoformtheirown
(MarshallandRossman,2006,p.114).Participatoryapproachesfocusonprocess,involvingthe
activeparticipationofvariousactorsinagivendecisionmakingprocess(vandenHove,2000).
Participatoryapproachesinsupportofdecisionmakingincludeappreciationinfluencecontrol,goal
orientedprojectplanning,participatoryruralappraisal,andbeneficiaryassessment.MCAcanalso
takeapurelyqualitativeform.Fortheprosandconsofparticipatoryapproaches,seeTothetal.
(2001,p.652).Otherqualitativeorientedapproachesincludesystematicclientconsultation,social
assessmentandteamup(Tothetal.,2001;Halsnsetal.,2007).
3.8 Policyinstrumentsandregulations
Abroadrangeofpolicyinstrumentsforclimatechangemitigationisavailabletopolicymakers.These
includeeconomicincentives,suchastaxes,tradeableallowances,andsubsidies;directregulatory
approaches,suchastechnologyorperformancestandards;informationprograms;government
provision,oftechnologiesorproducts;andvoluntaryactions.
Chapter13ofAR4providedatypologyanddefinitionofmitigationpolicyinstruments.Herewe
presentanupdateonthebasisofnewresearchonthedesign,applicability,interaction,andpolitical
economyofpolicyinstruments,aswellasonapplicabilityofpolicyinstrumentsindevelopedand
developingcountries.Fordetailsaboutapplicationsandempiricalassessmentsofmitigationpolicy
instruments,seeChapters712(sectorallevel),Chapter13(internationalcooperation),Chapter14
(regionalcooperation),andChapter15(nationalandsubnationalpolicies).
3.8.1 Economicincentives
Economic(ormarket)instrumentsincludeincentivesthataltertheconditionsorbehaviouroftarget
participantsandleadtoareductioninaggregateemissions.Ineconomicpolicyinstruments,a
distinctionismadebetweenpriceandquantity.Atradeableallowanceorpermitsystem
representsaquantitypolicywherebythetotalquantityofpollution(acap)isdefined,andtradingin
emissionrightsunderthatcapisallowed.Apriceinstrumentrequirespolluterstopayafixedprice
perunitofemissions(taxorcharge),regardlessofthequantityofemissions.
3.8.1.1 Emissionstaxesandpermittrading
Boththeapproachesdescribedabovecreateapricesignalasanincentivetoreducingemissions,
whichcanextendthroughouttheeconomy.Economicinstrumentswilltendtobemorecost
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effectivethanregulatoryinterventionsandmaybelesssusceptibletorentseekingbyinterest
groups.Theempiricalevidenceisthateconomicinstrumentshave,onthewhole,performedbetter
thanregulatoryinstruments,butthatinmanycasesimprovementscouldhavebeenmadethrough
betterpolicydesign(Hahn,1989;AnthoffandHahn,2010).
Box 3.7 Equivalence of emissions taxes and permit trading schemes

Pricebasedandquantitybasedinstrumentsareequivalentundercertainty,butdifferintheextent
ofmitigationandcostsifemissionsandabatementcostsareuncertaintotheregulator(Weitzman,
1974).Hybridinstruments,whereaquantityconstraintcanbeoverriddenifthepriceishigheror
lowerthanathreshold,havebeenshowntobemoreefficientunderuncertainty(Robertsand
Spence,1976;McKibbinandWilcoxen,2002;Pizer,2002).Variantsofhybridapproachesfeaturing
priceceilingsandpricefloorshavebeenimplementedinrecentemissionstradingschemes
(Chapters14and15).Thepossibilityofperiodicadjustmentstotaxratesandcapsandtheir
implementationunderpermitschemesfurtherbreaksdownthedistinctionbetweenpricebased
andquantitybasedmarketbasedinstruments.
Equivalencealsoexistsforfiscaleffectsandthecostsimposedonemitters.Untilrecently,mostof
theliteraturehasassumedthatemissionstaxesandpermittradingdifferintherevenuetheyyield
forgovernmentsandthecostsimposedonemitters,assumingthatemissionstaxrevenuefully
accruestogovernmentswhileunderemissionstradingschemespermitsaregivenfreelytoemitters.
Thiswasalsothecaseinearlypolicypractice(Chapters14and15).Ithasbeenwidelyassumedthat
permitschemesareeasiertoimplementpoliticallybecausepermitsareallocatedfreetoemitters.
However,recognitionhasgrownthatpermitscanbewhollyorpartlyauctioned,andthatan
emissionstaxneednotapplytothetotalamountofemissionscovered(e.g.,AldyJ.Eetal.,2010;
Goulder,2013).Taxthresholdscouldexemptpartoftheoverallamountofanemittersliabilities,
whilechargingthefulltaxrateonanyextraemissions,analogoustofreepermits(Pezzey,2003;
PezzeyandJotzo,2012).Conversely,governmentscouldauctionsomeorallpermitsinanemissions
tradingscheme,andusetherevenuetoreduceothermoredistortingtaxesandcharges(Section
3.6.3.3),assistconsumers,orpayforcomplementarypolicies.
3.8.1.2 Subsidies
Subsidiescanbeusedasaninstrumentofmitigationpolicybycorrectingmarketfailuresinthe
provisionoflowcarbontechnologiesandproducts.Theyhaveaparticularroleinsupportingnew
technologies.EmpiricalresearchhasshownthatsocialratesofreturnonR&Dcanbehigherthan
privateratesofreturn,sincespilloversarenotfullyinternalizedbythefirms(see3.11).
Subsidiesarealsousedtostimulateenergyefficiencyandrenewableenergyproduction.Such
subsidiesdogenerallynotfullycorrectnegativeexternalitiesbutrathersupportthealternatives,and
arelessefficientalternativestocarbontaxesandemissiontradingforinducingmitigation.Energy
subsidiesareoftenprovidedforfossilfuelproductionorconsumption,andprovetoincrease
emissionsandputheavyburdensonpublicbudgets(LinandJiang,2011;ArzedelGranadoetal.,
2012;Gunningham,2013).Loweringorremovingsuchsubsidieswouldcontributetoglobal
mitigation,butthishasproveddifficult(IEAetal.,2011).
Subsidiestorenewableenergyandotherformsofgovernmentexpenditureonmitigationalsohave
otherdrawbacks.First,publicfundsneedtoberaisedtofinancetheexpenditures,withwellknown
economicinefficienciesarisingfromtaxation(BallardandFullerton,1992).Second,subsidies,ifnot
correctingmarketfailures,canleadtoexcessiveentryinto,orinsufficientexitfrom,anindustry
(Stigler,1971).Third,subsidiescanbecomepoliticallyentrenched,withthebeneficiarieslobbying
governmentsfortheirretentionattheexpenseofsocietyoverall(Tullock,1975).
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Hybridsoffeesandsubsidiesarealsoinuse.Arenewableenergycertificatesystemcanbeviewedas
ahybridwithafeeonenergyconsumptionandasubsidytorenewableproduction(e.g.,Amundsen
andMortensen,2001).Feebates(Greeneetal.,2005)involvesettinganobjective,suchasaverage
vehiclefueleconomy;thenfirmsorindividualsthatunderperformpayafeeperunitofunder
performanceandoverperformersreceiveasubsidy.Theincentivesmaybestructuredtogenerate
nonetrevenuethefeescollectedfinancethesubsidy.
3.8.2 Directregulatoryapproaches
Prescriptiveregulationinvolvesrulesthatmustbefulfilledbypolluterswhofaceapenaltyincaseof
non-compliance.ExamplesareperformancestandardsthatspecifythemaximumallowableGHG
emissionsfromparticularprocessesoractivities;technologystandardsthatmandatespecific
pollutionabatementtechnologiesorproductionmethods;andproductstandardsthatdefinethe
characteristicsofpotentiallypollutingproducts,includinglabellingofappliancesinbuildings,
industry,andthetransportsector(FreemanandKolstad,2006).
Theseregulatoryapproacheswilltendtobemoresuitableincircumstanceswherethereachor
effectivenessofmarketbasedinstrumentsisconstrainedbecauseofinstitutionalfactors,including
lackofmarketsinemissionsintensivesectorssuchasenergy.Inmixedeconomies,wherepartsof
theeconomyarebasedoncommandandcontrolapproacheswhileothersrelyonmarkets,effective
climatechangemitigationpolicywillgenerallyrequireamixofmarketandnonmarketinstruments.
3.8.3 Informationprogrammes
ReductionsinGHGemissionscanalsobeachievedbyprovidingaccurateandcomprehensive
informationtoproducersandconsumersonthecostsandbenefitsofalternativeoptions.
Informationinstrumentsincludegovernmentalfinancingofresearchandpublicstatistics,and
awarenessraisingcampaignsonconsumptionandproductionchoices(MontandDalhammar,2005).
3.8.4 Governmentprovisionofpublicgoodsandservices,andprocurement
GovernmentfundingofpublicgoodsandservicesmaybeaimeddirectlyatreducingGHGemissions,
forexample,byprovidinginfrastructuresandpublictransportservicesthatuseenergymore
efficiently;promotingR&Doninnovativeapproachestomitigation;andremovinglegalbarriers
(Creutzigetal.,2011).
3.8.5 Voluntaryactions
Voluntaryagreementscanbemadebetweengovernmentsandprivatepartiesinordertoachieve
environmentalobjectivesorimproveenvironmentalperformancebeyondcompliancewith
regulatoryobligations.Theyincludeindustryagreements,selfcertification,environmental
managementsystems,andselfimposedtargets.Theliteratureisambiguousaboutwhetherany
additionalenvironmentalgainsareobtainedthroughvoluntaryagreements(Koehler,2007;Lyonand
Maxwell,2007;BorckandCoglianese,2009).
3.8.6 Policyinteractionsandcomplementarity
Mostoftheliteraturedealswiththeuseandassessmentofoneinstrument,orcomparesalternative
options,whereas,inreality,numerous,oftenoverlappinginstrumentsareinoperation(seeChapters
716).Multipleobjectivesinadditiontoclimatechangemitigation,suchasenergysecurityand
affordabilityandtechnologicalandindustrialdevelopment,maycallformultiplepolicyinstruments.
Anotherquestioniswhetherandtowhatextentemissionspricingpoliciesneedtobe
complementedbyregulatoryandotherinstrumentstoachievecosteffectivemitigation,for
example,becauseofadditionalmarketfailures,asinthecaseofenergyefficiency(Box3.10)and
technologicaldevelopment(3.11.1).
However,thecoexistenceofdifferentinstrumentscreatessynergies,overlapsandinteractionsthat
mayinfluencetheeffectivenessandcostsofpoliciesrelativetoatheoreticaloptimum(Kolstadetal.,
49of128

1990;seealsoSection3.6above).Recentstudieshaveanalyzedinteractionsbetweentradeable
quotasorcertificatesforrenewableenergyandemissiontrading(e.g.,MstandFichtner,2010;
BhringerandRosendahl,2010)andemissionstradingandtradeablecertificatesforenergy
efficiencyimprovements(e.g.,Mundaca,2008;Sorrelletal.,2009)(seealsoChapters9and15).
Similareffectsoccurintheoverlayofotherselectivepolicyinstrumentswithcomprehensivepricing
instruments.Policyinteractionscanalsocreateimplementationandenforcementchallengeswhen
policiesareconcurrentlypursuedbydifferentlegaloradministrativejurisdictions(Goulderand
Parry,2008;GoulderandStavins,2011).
3.8.7 Governmentfailureandpolicyfailure
Toachievelargeemissionsreductions,policyinterventionswillbeneeded.Butfailureisalwaysa
possibility,asshownbyrecentexperiencesinvolvingmitigationpolicies(Chapters1316).The
literatureisbeginningtoreflectthis.Thefailureofsuchpoliciestendstobeassociatedwiththe
translationofindividualpreferencesintogovernmentaction.
3.8.7.1 Rentseeking
Policyinterventionscreaterents,includingsubsidies,pricechangesarisingfromtaxationor
regulation,andemissionspermits.Privateinterestslobbygovernmentsforpoliciesthatmaximize
thevalueoftheirassetsandprofits.Thesumsinvolvedinmitigatingclimatechangeprovide
incentivestotheownersofassetsinGHGintensiveindustriesortechnologiesforlowcarbon
productiontoengageinrentseeking.
27
Thepoliticaleconomyofinterestgrouplobbying(Olson,1971)isapparentintheimplementationof
climatechangemitigationpolicies.Examplesincludelobbyingforallocationsoffreepermitsunder
theemissionstradingschemesinEurope(Hepburnetal.,2006;Sijmetal.,2006;Ellerman,2010)
andAustralia(Pezzeyetal.,2010)aswellasrenewableenergysupportpoliciesinseveralcountries
(Helm,2010).
Tominimizetheinfluenceofrentseekingandtheriskofregulatorycapture,twobasicapproaches
havebeenidentified(Helm,2010).Oneistogiveindependentinstitutionsastrongrole,forexample,
theUnitedKingdomsCommitteeonClimateChange(McGregoretal.,2012)andAustraliasClimate
ChangeAuthority(KeenanR.Jetal.,2012)(seealsoChapter15).
Anotherapproachtoreducingrentseekingistorelylessonregulatoryapproachesandmoreon
marketmechanisms,whicharelesspronetocapturebyspecialinterestsbecausethevalueand
distributionofrentsismoretransparent.Thismayofcourseleadtootherproblemsassociatedwith
regulatorydesign.
3.8.7.2 Policyuncertainty
Oneaimofclimatechangemitigationpolicyistopromoteemissionsreducinginvestmentsinsectors
whereassetshavealongeconomiclifespan,suchasenergy(Chapter7),buildings(Chapter9)and
transport(Chapter8).Investmentdecisionsaremainlybasedonexpectationsaboutfuturecostsand
revenues.Therefore,expectationsaboutfuturepolicysettingscanbemoreimportantthancurrent
policiesindeterminingthenatureandextentofinvestmentformitigation(Ulph,2013).
Uncertaintyoverfuturepolicydirections,includingchangesinexistingpoliciesarisingfrom,say,
politicalchange,canaffectinvestmentdecisionsandinhibitmitigation,aswellascreateeconomic
costs(Weitzman,1980;seealsoChapter2).Toachievecosteffectivemitigationactions,astableand
predictablepolicyframeworkisrequired.
27
CBAtakesintoaccountthatgovernmentsaresocialprofitmaximizers,whichmaynotnecessarilybethe
case.
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Box 3.8 Different conditions in developed and developing countries and implications for suitability of
policy instruments
Differencesineconomicstructure,institutions,andpolicyobjectivesbetweenlowincomeandhigh
incomecountriescanmeandifferencesinthesuitabilityandperformanceofpolicyinstruments.
Overridingpolicyobjectivesinmostdevelopingcountriestendtobestronglyorientedtowards
facilitatingdevelopment(Koketal.,2008),increasingaccesstoenergyandalleviatingpoverty(see
Chapters4and14).Ingeneral,theyhavefewerhumanandfinancialresources,lessadvanced
technology,andpoorerinstitutionalandadministrativecapacitythandevelopedcountries.Thismay
constraintheirabilitytoevaluate,implement,andenforcepolicies.Further,theprerequisitesfor
effectiveness,suchasliberalizedenergymarketstounderpinpricebasedemissionsreduction
instruments,areoftenlacking.Thus,theuseofsomepolicyinstruments,includingcarbontrading
schemes,canposegreaterinstitutionalhurdlesandimplementationcosts,ornotbefeasible.
Capacitybuildingisthereforecriticalincreatingmechanismstosupportpolicychoicesand
implementation.Economicreformmayalsobeneededinordertoremovedistortionsinregulatory
andpricingmechanismsandenableeffectivemitigationpoliciestobedevisedandimplemented.
Theopportunitycostofcapital,andofgovernmentresourcesinparticular,maybehigherin
developingcountriesthanindevelopedcountries.Consequently,thepayofffrommitigationpolicies
needstobehigherthanindevelopedcountriesinorderformitigationinvestmenttobejudged
worthwhile.Thus,developingcountriesmayrequireinternationalfinancialassistanceinorderto
supporttheirmitigationactivitiesormakethemeconomicallyviable.
3.9 Metricsofcostsandbenefits
Thissectionfocusesonconceptualissuesthatariseinthequantificationandmeasurement,usinga
commonmetric,oftheprosandconsassociatedwithmitigationandadaptation(i.e.,benefitsand
costs).Howcostsarebalancedagainstbenefitsinevaluatingaclimatepolicyisamatterforethics,
ashasrepeatedlybeenemphasizedinthischapter.Thediscussionislargelybasedontheeconomic
paradigmofbalancingcostsagainstbenefits,withbothmeasuredinmonetaryunits.Butleaving
asidehowbenefitsandcostsaremonetizedorbalancedtodeveloppolicy,theunderlying
informationcanbehelpfulforpolicymakerswhoadoptotherethicalperspectives.Thissectionis
alsorelevantformethodsthatreduceperformancetoasmallnumberofmetricsratherthanasingle
one(suchasMCA).
Webeginwiththechainofcauseandeffect.Thechainstartswithhumanactivitythatgenerates
emissionsthatmaybereducedwithmitigation(recognizingthatnaturealsocontributesto
emissionsofGHGs).TheglobalemissionsofGHGsleadtochangesinatmosphericconcentrations,
thentochangesinradiativeforcing,andfinallytochangesinclimate.Thelatteraffectbiologicaland
physicalsystemsingoodaswellasbadways(includingthroughimpactsonagriculture,forests,
ecosystems,energygeneration,fire,andfloods).Thesechangesinturnaffecthumanwellbeing,
negativelyorpositively,withbothmonetaryandotherconsequences.
28
Eachlinkinthechainhasa
timedimension,sinceemissionsataparticularpointintimeleadtoradiativeforcingatfuturepoints
intime,whichlaterleadtomoreimpactsanddamages.Thelinksalsohavespatialdimensions.
Modelsplayakeyroleindefiningtherelationshipsbetweenthelinksinthechain.GlobalClimate
Models(GCMs)translateemissionsthroughatmosphericconcentrationsandradiativeforcinginto
28
Werefertoeffectsonbiologicalandphysicalsystemsasimpacts,andeffectsofthoseimpactsonhuman
wellbeingasdamages,whetherpositiveornegative.Theseeffectsmayincludenonhumanimpactsthatare
ofconcerntohumans(seealsoSections3.4.1and3.4.3).
51of128

changesinclimate.Othermodelsincludingcrop,forestgrowthandhydrologymodelstranslate
changesinclimateintophysicalimpacts.Economicmodelstranslatethoseimpactsintomeasures
thatreflectahumanperspective,typicallymonetarymeasuresofwelfarelossorgain.GCMs
aggregateemissionsofvariousgasesintoanoveralllevelofradiativeforcing;hydrologymodels
aggregateprecipitationatmultiplelocationswithinawatershedintostreamflowatagivenlocation;
economicmodelsaggregateimpactsintoanoverallmeasureofwelfareloss.
Muchoftheliteratureonimpactsfocusesonparticulartypesofimpactsatparticularlocations.
AnotheraspectinvolvesmetricsthatallowdifferentialregulationofdifferentGHGs,forinstance,the
relativeweightthatregulatorsshouldplaceonCH
4
andCO
2
inmitigationstrategies.Becauseimpacts
anddamagesaresopoorlyknownithasprovedsurprisinglydifficulttoprovidearigorousanswerto
thatquestion.
3.9.1 Thedamagesfromclimatechange
Theimpactsofclimatechangemaybenefitsomepeopleandharmothers.Itcanaffecttheir
livelihood,health,accesstofood,waterandotheramenities,andnaturalenvironment.Whilemany
nonmonetarymetricscanbeusedtocharacterizecomponentsofimpacts,theyprovideno
unambiguousaggregationmethodsforcharacterizingoverallchangesinwelfare.Inprinciple,the
economictheoryofmonetaryvaluationprovidesaway,albeitanimperfectone,ofperformingthis
aggregationandsupportingassociatedpolicymakingprocesses.
Changesthataffecthumanwellbeingcanbemarketornonmarketchanges.Marketeffects
involvechangesinprices,revenueandnetincome,aswellasinthequantity,quality,oravailability
ofmarketcommodities.Keyistheabilitytoobservebothpricesandhowpeoplerespondtothem
whenchoosingquantitiestoconsume.Nonmarketchangesinvolvethequantity,quality,or
availabilityofthingsthatmattertopeopleandwhicharenotobtainedthroughthemarket(e.g.,
qualityoflife,culture,andenvironmentalquality).Achangeinaphysicalorbiologicalsystemcan
generatebothmarketandnonmarketdamagetohumanwellbeing.Forexample,anepisodeof
extremeheatinaruralareamaygenerateheatstressinfarmlabourersandmaydryupawetland
thatservesasarefugeformigratorybirds,whilekillingsomecropsandimpairingthequalityof
others.Fromaneconomicperspective,damageswouldbeconceptualizedasalossofincomefor
farmersandfarmworkers,anincreaseincroppricesforconsumersandareductionintheirquality;
andnonmarketimpactsmightincludetheimpairmentoftheecosystemandhumanhealth(though
somehealtheffectsmaybecapturedinthewagesoffarmworkers).
Economistsdefinevalueintermsofatradeoff.AsdiscussedinSection3.6.1,theeconomicvalue
ofanitem,measuredinmoneyterms,isdefinedastheamountofincomethatwouldmakeaperson
whole,eitherinlieuoftheenvironmentalchangeorinconjunctionwiththeenvironmentalchange;
thatis,itsincomeequivalent.ThisequivalenceisevaluatedthroughtheWillingnessToPay(WTP)
andWillingnessToAccept(WTA)compensationmeasures(seealsoWillig,1976;Hanemann,1991).
Theiteminquestionmayormaynotbeamarketedcommodity:itcanbeanythingthattheperson
values.Thus,theeconomicvalueofanitemisnotingeneralthesameasitspriceorthetotal
expenditureonit.Theeconomicconceptofvaluebasedonatradeoffhassomecritics.Theitem
beingvaluedmaybeseenasincommensurablewithmoney,suchthatnotradeoffispossible.Or,
thetradeoffmaybedeemedinappropriateorunethical(e.g.,Kelman,1981;seealsoJamieson,
1992;Sagoff,2008).Inaddition,whiletheeconomicconceptofvalueisdefinedforanindividual,itis
typicallymeasuredforaggregatesofindividuals,andtheissueofequityweightingisoften
disregarded(Nyborg,2012seealsoSubsection3.5.1.3).
29
29
TheuseofthetermwillingnessinWTPandWTAshouldnotbetakenliterally.Forinstance,individuals
mayhaveawillingnesstopayforcleanerair(thereductioninincomethatwouldbeequivalentinwelfare
52of128

ThemethodsusedtomeasureWTPandWTAfallintotwocategories,knownasrevealed
preferenceandstatedpreferencemethods.Foramarketeditem,anindividualspurchase
behaviourrevealsinformationabouttheirvalueofit.Observationofpurchasebehaviourinthe
marketplaceisthebasisoftherevealedpreferenceapproaches.Onecanestimateademand
functionfromdataonobservedchoicebehaviour.Then,fromtheestimateddemandfunction,one
caninferthepurchasersWTPorWTAvaluesforchangesintheprice,quantity,quality,or
availabilityofthecommodity.Anotherrevealedpreferenceapproach,knownasthehedonicpricing
method,isbasedonfindinganobservedrelationshipbetweenthequalitycharacteristicsof
marketeditemsandthepriceatwhichtheyaresold(e.g.,betweenthepriceoffarmlandandthe
conditionandlocationofthefarmland).Fromthisapproach,onecaninferthemarginalvalueofa
changeincharacteristics.
30
Forinstance,somehaveattemptedtomeasureclimatedamagesusing
anhedonicapproachbasedonthecorrelationofresidentialhousepricesandclimateindifferent
areas(CraggandKahn,1997;Maddison,2001,2003;MaddisonandBigano,2003;Rehdanzand
Maddison,2009).Theprimarylimitationofrevealedpreferencemethodsisthefrequentlackofa
marketassociatedwiththeenvironmentalgoodbeingvalued.
Withstatedpreference,theanalystemploysasurveyorexperimentthroughwhichsubjectsare
confrontedwithatradeoff.Withcontingentvaluation,forexample,theyareaskedtochoose
whetherornottomakeapayment,suchasataxincreasethatallowsthegovernmenttoundertake
anactionthataccomplishesaspecificoutcome(e.g.,protectingaparticularecosystem).Byvarying
thecostacrosssubjectsandthencorrelatingthecostofferedwiththepercentageofyesresponses,
theanalysttracesoutaformofdemandfunctionfromwhichtheWTP(orWTA)measurecanbe
derived.Withchoiceexperiments,subjectsareaskedtomakerepeatedchoicesamongalternative
optionsthatcombinedifferentoutcomeswithdifferentlevelsofcost.
31
Althoughagrowingnumber
ofresearchersusestatedpreferencestudiestomeasurethepublicsWTPforclimatechange
mitigation,oneprominentcriticismisthehypotheticalnatureofthechoicesinvolved.
32
Allthesemethodshavebeenappliedtovaluingthedamagesfromclimatechange.
33
AR2containeda
reviewoftheliteratureontheeconomicvaluationofclimatechangeimpacts.Sincethen,the
literaturehasgrownexponentially.Theeconomicmethodologyhaschangedlittle(exceptformore
coverageofnonmarketimpactsandmoreuseofstatedpreference).Themainchangeisinthe
spatialrepresentationofclimatechangeimpacts;whereastheolderliteraturetendedtomeasure
theeconomicconsequencesofauniformincreaseof,say2.5
o
CacrosstheUnitedStates,therecent
literatureusesdownscalingtomeasureimpactsonafinespatialscale.Mostoftherecentliterature
termstoanincreaseinairquality)buttheymaybeveryunwillingtomakethatpayment,believingthatclean
airisarightthatshouldnothavetobepurchased.
30
DetailsofthesemethodscanbefoundinBecht(1995),chaptersbyMcConnellandBockstael(2006),
Palmquist(2006),PhaneufandSmith(2006),MlerandVincent(2005),orintextbookssuchasKolstad(2010),
Champ,BoyleandBrown(2003),HaabandMcConnell(2002)orBockstaelandMcConnell(2007).
31
DetailscanbefoundinCarsonandHanemann(2005),orintextbookssuchasChamp,BoyleandBrown
(2003),HaabandMcConnell(2002),andBennettandBlamey(2001).
32
ExamplesincludeBerrensetal.(2004),LeeandCameron(2008),SolomonandJohnson(2009),andAldyetal.
(2012)fortheU.S.;AkterandBennett(2011)forAustralia;Longoetal.(2012)forSpain;Leeetal.(2010)for
Korea;Adamanetal.(2011)forTurkey;andCarlssonetal.(2012)foracomparativestudyofWTPinChina,
SwedenandtheUS.
33
Othereconomicmeasuresofdamagearesometimesusedthatmaynotbeappropriate.Theeconomic
damageis,inprinciple,thelesserofthevalueofwhatwaslostorthecostofreplacingit(assumingasuitable
andappropriatereplacementexists).Therefore,thereplacementcostitselfmayormaynotbearelevant
measure.Similarly,ifthecostofmitigationisactuallyincurred,itisalowerboundonthevalueplacedonthe
damageavoided.Otherwise,themitigationcostisirrelevantifnobodyiswillingtoincurit.
53of128

ontheeconomicvaluationsofclimatechangehasfocusedonmarketimpacts,especiallyimpactson
agriculture,forestry,sealevel,energy,water,andtourism.
34
Themostextensiveeconomicliteraturepertainstoagriculture.Thedemandformanysuch
commoditiesisofteninelastic,sotheshortrunconsequenceofanegativesupplyshockisaprice
increase;whileabenefittoproducers,itisharmfulforconsumers(RobertsandSchlenker,2010;
Lobelletal.,2011).Somestudiesmeasuretheeffectofweatheroncurrentprofits,ratherthanthat
ofclimateonlongtermprofitability(e.g.,DeschnesandGreenstone,2007),andsomeexplorethe
effectofbothweatherandclimateoncurrentprofits(Kellyetal.,2005).Examiningweatherand
climatesimultaneouslyleadstodifficultiesinidentifyingtheseparateeffectsofweatherandclimate
(DeschnesandKolstad,2011),aswellasindealingwiththeconfoundingeffectsofpricechanges
(Fisheretal.,2012).Whilesomerecentstudieshavefoundthatextremeclimateeventshavea
disproportionateimpactonagriculturalsystems(SchlenkerandRoberts,2009;Lobelletal.,2011;
DeschnesandKolstad,2011;seealsoWGII,Section7.3.2.1),therelativelyhighdegreeofspatialor
temporalaggregationmeansthatthoseeventsarenotwellcapturedinmanyexistingeconomic
analyses.Anotherdifficultyisthewelfaresignificanceofshiftsinlocationofagriculturalproduction
causedbyclimate.Marketsforagriculturalcommoditiesarenationalorinternationalinscope,so
someeconomicanalysesfocusonaggregateinternationalproducerandconsumerwelfare.Under
thepotentialParetocriterion,transfersofincomefromoneregiontoanotherareofnowelfare
significance,thoughofrealpolicysignificance.
35
Withothermarketsectors,theliteratureisbothsparseandhighlyfragmented,butincludessome
estimatesofeconomicimpactsofclimatechangeonenergy,water,sealevelrise,tourism,and
healthinparticularlocations.Withregardtoenergy,climatechangeisexpectedtoreducedemand
forheatingandincreasedemandforcooling(seeWGIIAR5,Chapter10).Evenifthosetwoeffects
offsetoneanother,theeconomiccostneednotbenegligible.Withwatersupply,whatmattersin
manycasesisnottotalannualprecipitationbutthematchbetweenthetimingofprecipitationand
thetimingofwateruse(StrzepekandBoehlert,2010).Thosequestionsrequireanalysisonafiner
temporalorspatialscalethanhastypicallybeenemployedintheeconomicdamageliterature.
Estimatesoftheeconomiccostsofariseinsealevelgenerallyfocusoneitherthepropertydamage
fromfloodingorontheeconomiccostsofprevention,forexample,seawallconstruction(Hallegatte
etal.,2007;Hallegatte,2008;2012).Theysometimesincludecostsassociatedwiththetemporary
disruptionofeconomicactivity.Estimatestypicallydonotmeasurethelossofwellbeingforpeople
harmedordisplacedbyflooding.
36
Similarly,theeconomicanalysesofclimatechangeimpactson
tourismhavefocusedonchanges,forexample,inthechoiceofdestinationandtheincomefrom
tourismactivitiesattributabletoanincreaseintemperature,butnotontheimpactsonparticipants
wellbeing.
37
34
Whilethereisalargeliteraturecoveringphysicalandbiologicalimpacts,exceptforagricultureandforestry
onlyatinyportionoftheliteraturecarriestheanalysistothepointofmeasuringaneconomicvalue.However,
theliteratureisexpanding.AWebofKnowledgesearchontheterms(climatechangeorglobalwarming)
anddamageandeconomicimpactsreturns39papersforpre2000,136papersfor20002009and209
papersfor2010throughSeptember2013.
35
Thesameissueariseswiththeeffectsontimberproductioninaglobaltimbermarket;seeforexample,
Sohngenetal.(2001).
36
ExceptionsincludeDanieletal.(2009)andBotzenandvandenBergh(2012).CardosoandBenhin(2011)
provideastatedpreferencevaluationofprotectingtheColumbianCaribbeancoastfromsealevelrise.
37
ExceptionsincludePendletonandMendelsohn(1998);LoomisandRichardson(2006);Richardsonand
Loomis(2004);Pendletonetal.,(2011);TsengandChen(2008);andforcommercialfishing,Naritaetal(2012).
54of128

Theeconomicmetricsconventionallyusedintheassessmentofnonclimatehealthoutcomeshave
alsobeenusedtomeasuretheimpactofclimateonhealth(e.g.,DeschnesandGreenstone,2011;
WatkissandHunt,2012).MeasurestoreduceGHGsmayalsoreduceotherpollutantsassociated
withfossilfuelcombustion,suchasNO
x
andparticulates,whichleadtotimelostfromworkand
reducedproductivity(stblomandSamakovlis,2007).Exposuretohighambienttemperaturesis
knowntodiminishworkcapacityandreducelabourproductivity.
38
3.9.2 Aggregateclimatedamages
Thissectionfocusesontheaggregateregionalandglobaleconomicdamagesfromclimatechangeas
usedinIAMstobalancethebenefitsandcostsofmitigationonaglobalscale.
Thefirstestimatesoftheeconomicdamageassociatedwithaspecificdegreeofclimatechange
weremadefortheUnitedStates(SmithandTirpak,1989;Nordhaus,1991;Cline,1992;Titus,1992;
Fankhauser,1994).Thesestudiesinvolvedstaticanalysesestimatingthedamageassociatedwitha
particularclimateendpoint,variouslytakentobea1
o
C,2.5
o
C,or3
o
Cincreaseinglobalaverage
annualtemperature.ThisapproachgavewaytodynamicanalysesinIAMsthattrackeconomic
output,emissions,atmosphericCO
2
concentration,anddamages.BecausesomeIAMsexaminecosts
andbenefitsfordifferentlevelsofemissions,theyneeddamagefunctionsratherthanpoint
estimates.
ThreeIAMshavereceivedmostattentionintheliterature,allinitiallydevelopedinthe1990s.The
DICEmodelwasfirstpublishedinNordhaus(1993a;b)buthaditsgenesisinNordhaus(1977);its
regionallydisaggregatedsiblingRICEwasfirstpublishedbyNordhausandYang(1996).
39
TheFUND
modelwasfirstpublishedinTol(1995).AndthePAGEmodel,developedforEuropeandecision
makers,wasfirstpublishedinHopeetal.(1993)andwasusedintheStern(2007)review.
40
The
modelshaveundergonevariousrefinementsandupdates.
41
Whiledetailshavechanged,their
generalstructurehasstayedthesame,andquestionsremainaboutthevalidityoftheirdamage
functions(seePindyck,2013).
TheIAMsuseahighlyaggregatedrepresentationofdamages.ThespatialunitofanalysisinDICEis
theentireworld,whereastheworldisdividedinto12broadregionsinRICE,16regionsinFUND,and
eightinPAGE.DICEandRICEhaveasingleaggregatedamagefunctionforthechangeinglobalor
regionalGDPasafunctionoftheincreaseinglobalaveragetemperature,heredenotedT
t
,andsea
levelrise(whichinturnismodelledasafunctionofT
t
).PAGEhasfourseparatedamagefunctions
fordifferenttypesofdamagesineachregion:economic,noneconomic,sealevelrise,andclimate
discontinuity(asafunctionofT
t
andthederivativeriseinsealevel).FUNDhaseightsectoral
damagefunctionsforeachregion,witheachdamagedependentontheregionalT
t
and,insome
38
SeeKjellstrometal.(2009),ZivinandNeidell(2010),orDunneetal(2013).Somerecentstudieshave
focusedonthecorrelationbetweenhightemperaturesandpoverty(Nordhaus,2006),thelinkbetween
fluctuationsintemperature,cyclonesandfluctuationsineconomicactivity(Delletal.,2009,2012;Hsiang,
2010),andtheconnectionbetweenclimatechangeandhumanconflict(Hsiangetal.,2013).
39
TherearemanyextensionsofDICE,includingADDICE(deBruinetal.,2009),withamoreexplicittreatment
ofadaptation.
40
SomeotherIAMshavedamagefunctions,includingtheMERGEModel(ManneandRichels,1992,1995,
2004a);theCETAmodel(PeckandTeisberg,1992,1994);and,morerecently,severalIAMsdevelopedby
EuropeanresearchersincludingtheWITCHmodel(Bosettietal.,2006),itsextensiontheADWITCHmodel
(Boselloetal.,2010),theENVISAGEmodel(RosonandMensbrugghe,2012),andamodeldevelopedbyEboli
etal.(2010)andBoselloetal.(2012).
41
Themostrecentversionsare:DICE2013(NordhausandSztorc,2013);RICE2010(Nordhaus,2010);PAGE
2009(Hope,2011,2013);FUND3.7(AnthoffandTol,2013).
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cases,therateofchangeinT
t
.Adaptationandcatastrophicdamageareincludedinaverysimple
wayinsomemodels(Greenstoneetal.,2013).
LetD
jkt
denotedamagesoftypejinyeartandregionk,expressedasaproportionofpercapitaGDP
inthatyearandregion,Y
kt
.Thedamagefunctions,sayD
jkt
=D
jkt
(T
t
)arecalibratedbasedon:(1)the
modellerschoiceofaparticularalgebraicformulaforD
jkt
(T
t
):(2)thecommonassumptionofzero
damageattheorigin[D
jkt
(0)=0];and(3)themodellersestimateofdamagesatabenchmarkchange
inglobalaveragetemperature,T*(typicallyassociatedwithadoublingofatmosphericCO
2
).For
example,intheoriginalversionsofPAGEandDICEthedamagefunctionresolvesintoapower
function:
Equation3.9.1. D
jt
=a
j
[T
t
/T*]
b
Y
t
wherebisacoefficientestimatedorspecifiedbythemodeller,anda
j
isthemodellersestimateof
theeconomicdamageforthebenchmarktemperaturechange.
42
InDICE,b=2ischosen.
43
InPAGE,
bisarandomvariablebetween1.5and3.InFUND,thedamagefunctionsaredeterministicbuthave
aslightlymorecomplicatedstructureandcalibrationthaninEquation3.9.1.
Becauseeachdamagefunctionisconvex(withincreasingmarginaldamage),thehighdegreeof
spatialandtemporalaggregationcausesthemodeltounderstateaggregatedamages.Thiscanbe
seenbyrepresentingthespatialortemporaldistributionofwarmingbyameanandvariance,and
writingexpecteddamagesinasecondorderexpansionaroundthemean.
AconcernmaybewhetherthecurvaturereflectedinEquation3.9.1isadequate.Thefunctionsare
calibratedtothetypicalwarmingassociatedwithadoublingofCO
2
concentration,alongwith
associateddamage.Theaggregatedamageisbasedonheroicextrapolationstoaregionalorglobal
scalefromasparsesetofstudies(somefromthe1990s)doneatparticulargeographiclocations.The
impactsliteratureisnowpayingsomewhatmoreattentiontohigherlevelsofwarming(Newetal.
(2011),WorldBank(2012),andWGIISection19.5.1),thoughestimatesofmonetarydamageremain
scarce(however,theliteratureisexpandingrapidly).Anotherconcernisthepossibilityoftipping
pointsandextremeevents(Lentonetal.,2008),possiblyincludingincreasesinglobaltemperature
aslargeas1012
o
Cthatarenotalwaysreflectedinthecalibration(SherwoodandHuber,2010).
Theeconomiclossorgainfromwarminginagivenyeartypicallydependsonthelevelofwarmingin
thatsameyear,withnolaggedeffects(atleastfordamagesotherthansealevelriseinDICE,the
noncatastrophecomponentofdamagesinPAGE,andsomesectorsofFUND).Thus,impactsare(a)
reversible,and(b)independentofthepriortrajectoryoftemperatures.Thisassumptionsimplifies
thecomputations,butsomeimpactsanddamagesmayactuallydependontherateofincreasein
temperature.
44
Theoptimaltrajectoryofmitigationandthelevelofdamagescouldalsodependon
thecumulativeamountofwarminginpreviousyears(measured,say,indegreeyears).
DICE,FUNDandPAGErepresentdamageasequivalenttoachangeinproductionofmarket
commoditiesthatisproportionaltooutput(amultiplicativeformulation).Weitzman(2010a)finds
thatthisspecificationmatterswithhighlevelsofwarmingbecauseanadditiveformulationleadsto
moredrasticemissionreduction.Besidesaffectingcurrentmarketproduction,climatechangecould
damagenatural,human,orphysicalcapital(e.g.,throughwildfiresorfloods).Damagetocapital
stocksmaylastbeyondayearandhavelingeringimpactsthatarenotcapturedincurrent
formulations(Wuetal.,2011).Economicconsequencesdependonwhatisassumedaboutthe
42
Typically,T*is2.5or3
o
C.WhenT
t
=T*inthisequation,thenD
jt
=a
j
Y
t
.
43
ThisformulationisalsousedbyKandlikar(1996a)andHammittetal.(1996a)withb=1,2or3.
44
ThisrateofchangewasconsideredbyManneandRichels(2004a)inMERGEandbyPeckandTeisberg
(1994)inCETA.Thelatterfoundthatitcanhavequitealargeeffectonthesizeoftheoptimalcarbontax.
56of128

elasticityofsubstitutionintheutilityfunctionbetweenmarketcommoditiesandnonmarketclimate
impacts.Anelasticityofsubstitutionofunityisequivalenttotheconventionalmultiplicative
formulation,butavaluelessthanunity,generatesamoredrastictrajectoryofemissionreductions
(Krutilla,1967;SternerandPersson,2008).
TheutilityfunctioninthesethreeIAMsdoesnotdistinguishbetweenthewelfaregainsderivingfrom
riskreductionwhenpeopleareriskaverseversusthegainsfromsmoothingconsumptionovertime
whenpeoplehavedecliningmarginalutilityofincome:bothpreferencesarecapturedbythe
curvatureoftheutilityfunctionasmeasuredby,inEquation3.6.4.However,KrepsandPorteus
(1978)andEpsteinandZin(1991)showthattwoseparatefunctionscanhaveseparateparameters
forriskaversionandintertemporalsubstitution.Thisformulationisusedsuccessfullyinthefinance
literaturetoexplainanomaliesinthemarketpricingoffinancialassets,includingtheequitypremium
(Campbell,1996;BansalandYaron,2004).Theinsightfromthisliteratureisthatthestandardmodel
ofdiscountedexpectedutility,usedinDICE,FUNDandPAGE,setstheriskpremiumtoolowandthe
discountratetoohigh,aresultconfirmedbyAckermanetal.(2013)andCrostandTraeger(2013).
OurgeneralconclusionisthatthereliabilityofdamagefunctionsincurrentIAMsislow.Usersshould
becautiousinrelyingonthemforpolicyanalysis:somedamagesareomitted,andsomeestimates
maynotreflectthemostrecentinformationonphysicalimpacts;theempiricalbasisofestimatesis
sparseandnotnecessarilyuptodate;andadaptationisdifficulttoproperlyrepresent.
Furthermore,theliteratureoneconomicimpactshasbeengrowingrapidlyandisoftennot
fullyrepresentedindamagefunctionsusedinIAMs.Someauthors(e.g.,WGIIChapter19)conclude
thesedamagefunctionsarebiaseddownwards.ItshouldbeunderscoredthatmostIAMsusedin
Chapter6ofthisvolumedonotconsiderdamagefunctionssothisparticularcriticismdoesnotapply
toChapter6analyses.
Box 3.9 Uncertainty and damages: the fat tails problem

Weitzman(2009,2011)hasdrawnattentiontowhathasbecomeknownasthefattailsproblem.He
emphasizedtheexistenceofachainofstructuraluncertaintiesaffectingboththeclimatesystem
responsetoradiativeforcingandthepossibilityofsomeresultingimpactsonhumanwellbeingthat
couldbecatastrophic.Uncertaintiesrelatetobothmeansofdistributionsandhighermoments.The
resultingcompoundedprobabilitydistributionofpossibleeconomicdamagecouldhaveafatbad
tail:i.e.,thelikelihoodofanextremelylargereductioninwellbeingdoesnotgoquicklytozero.
45
Withorwithoutriskaversion,theexpectedmarginalreductioninwellbeingassociatedwithan
incrementinemissionstodaycouldbeverylarge,eveninfinite
.46
SeealsoSection2.5.3.3.
Apolicyimplicationoftheconditionsdescribedinthepreviousparagraphisthattaileventscan
becomemuchmoreimportantindeterminingexpecteddamagethanwouldbethecasewith
probabilitydistributionswiththinnertails.Weitzman(2011)illustratesthisforthedistributionof
temperatureconsequencesofadoublingofatmosphericCO
2
(climatesensitivity),usingIPCCWGI
estimatestocalibratetwodistributions,onefattailedandonethintailed,tohaveamedian
45
Weitzman(2009)definesafattaileddistributionasonewithaninfinitemomentgeneratingfunction(athin
taileddistributionhasafinitemomentgeneratingfunction);moreintuitively,forafattaileddistribution,the
tailprobabilityapproacheszeromoreslowlythanexponentially.Forexample,thenormal(andany
distributionwithfinitesupport)wouldbethintailedwhereastheParetodistribution(apowerlaw
distribution)wouldbefattailed.
46
Weitzman(2007b,2009)arguedthattheexpectedmarginalreductioninwellbeingcouldbeinfinite.His
resultshavebeenchallengedbysomeastoopessimistic,e.g.,Nordhaus(2011a),Pindyck(2011)andCostello
etal.(2010).
57of128

temperaturechangeof3
o
Canda15%probabilityofatemperaturechangeinexcessof4.5
o
C.With
thiscalibration,theprobabilityoftemperaturesinexcessof8
o
Cisnearlytentimesgreaterwiththe
fattaileddistributionthanthethintaileddistribution.Ifhighconsequence,lowprobabilityevents
becomemorelikelyathighertemperatures,thentaileventscandominatethecomputationof
expecteddamagesfromclimatechange,dependingonthenatureoftheprobabilitydistributionand
otherfeaturesoftheproblem(includingtiminganddiscounting).
Atamoretechnicallevel,withsomefattaileddistributionsandcertaintypesofutilityfunctions
(constantrelativeriskaversion),theexpectationofamarginalreductioninwellbeingassociatedwith
anincrementinemissionsisinfinite.Thisisbecauseinthesecases,marginalutilitybecomesinfinite
asconsumptiongoestozero.Thisisatroublingresultsinceinfinitemarginaldamageimpliesall
availableresourcesshouldbededicatedtoreducingtheeffectsofclimatechange.ButasWeitzman
himselfandotherauthorshavepointedout,thisextremeresultisprimarilyatechnicalproblemthat
canbesolvedbyboundingtheutilityfunctionorusingadifferentfunctionalform.
Theprimaryconclusionfromthisdebateistheimportanceofunderstandingtheimpactsassociated
withlowprobability,highclimatechangescenarios.Thesemayinfactdominatetheexpected
benefitsofmitigation.
Thepolicyimplicationofthisconclusionisthatthenatureofuncertaintycanprofoundlychangehow
climatepolicyisframedandanalyzedwithrespecttothebenefitsofmitigation.Specifically,fatter
tailsonprobabilitydistributionsofclimateoutcomesincreasetheimportanceinunderstandingand
quantifyingtheimpactsandeconomicvalueassociatedwithtailevents(suchas8
o
Cwarming).Itis
naturaltofocusresearchattentiononmostlikelyoutcomes(suchasa3
o
CwarmingfromaCO
2
doubling),butitmaybethatlesslikelyoutcomeswilldominatetheexpectedvalueofmitigation.
3.9.3 Theaggregatecostsofmitigation
ReductionsinGHGemissionoftenimposecostsonfirms,households,andgovernmentsasaresult
ofchangesinprices,revenuesandnetincome,andintheavailabilityorqualityofcommodities.GHG
reductionrequiresnotonlytechnologicalbutalsobehaviouralandinstitutionalchanges,whichmay
affectwellbeing.Thechangesinwellbeingaremeasuredinmonetarytermsthroughachangein
incomethatisequivalenttotheimpactonwellbeing.Changesinpricesandincomesareoften
projectedthrougheconomicmodels(seeChapter6).Inmanycases,mitigationprimarilyinvolves
improvementsinenergyefficiencyorchangesinthegenerationanduseofenergyfromfossilfuels
inordertoreduceGHGemissions.
ThemodelsassessedinChapter6arecalledIAMs(orIntegratedModelsIMs)becausetheycouple
severalsystemstogether(suchastheeconomyandtheclimate)inanintegratedfashion,tracking
theimpactofchangesineconomicproductiononGHGemissions,aswellasofemissionsonglobal
temperaturesandtheeffectofmitigationpoliciesonemissions.AsdiscussedinSection6.2,the
IAMsusedinChapter6areheterogeneous.However,formostoftheChapter6IAMs,climate
changehasnofeedbackeffectsonmarketsupplyanddemand,andmostdonotincludedamage
functions.
47
Thecalculationofcostdependsonassumptionsmade(1)inspecifyingthemodels
structureand(2)incalibratingitsparameters.Themodelsarecalibratedtoactualeconomicdata.
Whilemorevalidationisrequired,somemodelsarevalidatedbymakingandtestingpredictionsof
theresponsetoobservedchanges(Valenzuelaetal.,2007;Beckmanetal.,2011;BaldosandHertel,
2013).Whilesomemodelsdonotaddresseitherthespeedorcostofadjustment,manymodels
incorporateadjustmentcostsandadditionalconstraintstoreflectdeviationsfromfulloptimization
(seeJacobyetal.,2006;Babikeretal.,2009;vanVuurenetal.,2009).Mostmodelsallowlittlescope
47
Climateisassumedtobeseparablefrommarketgoodsinthemodelsutilityfunctions.Ifthatassumptionis
incorrect,CarboneandSmith(2013)showthatthewelfarecalculationmayhavesignificanterror.
58of128

forendogenous(priceinduced)technicalchange(3.11.4)orendogenousnonpricebehavioural
factors(3.10.1).Itisamatterofdebatehowwellthemodelsaccuratelyrepresentunderlying
economicprocesses(seeBurtraw,1996;Burtrawetal.,2005;Hanemann,2010).
Besidesestimatingtotalcost,themodelscanbeusedtoestimateMarginalAbatementCost(MAC),
theprivatecostofabatingoneadditionalunitofemissions.Withacapandtradesystem,emissions
wouldtheoreticallybeabateduptothepointwhereMACequalsthepermitprice;withanemissions
tax,theywouldbeabatedtothepointwhereMACequalsthetaxrate.Itiscommontographthe
MACassociatedwithdifferentlevelsofabatement.Undersimplifiedconditions,theareaunderthe
MACcurvemeasuresthetotaleconomiccostofemissionsreduction,butnotifitfailstocapture
someoftheeconomywideeffectsassociatedwithlargeexistingdistortions(KlepperandPeterson,
2006;Paltsevetal.,2007;KesickiandEkins,2012;Morrisetal.,2012).However,aMACisastatic
approximationtothedynamicprocessinvolvedinpollutionabatement;itthushasitslimitations.
Box 3.10Could mitigation have a negative private cost?

Apersistentissueintheanalysisofmitigationoptionsandcostsiswhetheravailablemitigation
opportunitiescanbeprivatelyprofitablethatis,generatebenefitstotheconsumerorfirmthatare
inexcessoftheirowncostofimplementationbutwhicharenotvoluntarilyundertaken.Absent
anotherexplanation,anegativeprivatecostimpliesthatapersonisnotfullypursuinghisown
interest.(Bycontrast,anegativesocialcostariseswhenthetotalofeverybodysbenefitsexceeds
costs,suggestingthatsomeprivatedecisionmakerisnotmaximizingtheinterestsofothers.)The
notionthatavailablemitigationopportunitiesmayhavenegativecostsrecentlyreceivedattention
becauseofanalysesbyMcKinsey&Company(2009),Enkvistetal.(2007)andothersthatfocused
especiallyonenergyuseforlightingandheatinginresidentialandcommercialbuildings,andon
someagriculturalandindustrialprocesses.Muchofthisliteratureisinthecontextoftheenergy
efficiencygap,
48
whichdatestothe1970s,andthePorterhypothesis.
49
Theliteraturesuggestingthatavailableopportunitiesmayhavenegativecostoftenpointsto
institutional,political,orsocialbarriersasthecause.Butotherliteraturesuggestseconomic
explanations.Inaddition,however,evidenceindicatesthattheextentofsuchnegativecost
opportunitiescanbeoverstated,particularlyinpurelyengineeringstudies.
Engineeringstudiesmayoverestimatetheenergysavings,forexamplebecausetheyassumeperfect
installationandmaintenanceoftheequipment(Dubinetal.,1986;NadelandKeating,1991)orthey
failtoaccountforinteractionsamongdifferentinvestmentssuchasefficientlightingandcooling
(Huntington,2011).Engineeringstudiesalsomayfailtoaccountforallcostsactuallyincurred,
includingtimecosts,scarcemanagerialattentionandtheopportunitycostofthemoney,time,or
attentiondevotedtoenergyefficiency.
50
Insomecases,theengineeringanalysismaynotaccount
48
Theefficiencygapisdefinedasthedifferencebetweenthesociallydesirableamountofenergyefficiency
(howeverdefined)andwhatfirmsandconsumersarewillingtoundertakevoluntarily(seeMeierandWhittier,
1983;JoskowandMarron,1992,1993;JaffeandStavins,1994).
49
Porter(1991)andPorterandvanderLinde(1995)arguedthatunilateralreductionsinpollutioncould
stimulateinnovationandimprovefirmscompetitivenessasabyproduct;seealsoLanoieetal(2008);Jaffe
andPalmer(1997).Thesubsequentliteraturehasobtainedmixedfinding(AmbecandBarla,2006;Ambecet
al.,2013).
50
Forexample,AndersonandNewell(2004)examinedenergyauditsformanufacturingplantsandfoundthat
roughlyhalfoftheprojectsrecommendedbyauditorswerenotadopteddespiteextremelyshortpayback
periods.Whenasked,plantmanagersrespondedthatasmuchas93percentoftheprojectswererejectedfor
economicreasons,manyofwhichrelatedtohighopportunitycosts.JoskowandMarron(1992,1993)show
someengineeringestimatesunderstatedactualcosts.
59of128

forreductionsinquality(e.g.,CFLlightingisperceivedasprovidinglessattractivelightingservices).
Choicesmayalsobeinfluencedbyuncertainty(e.g.,thisisanunfamiliarproduct,onedoesntknow
howwellitwillwork,orwhatfutureenergypriceswillbe).Anotherconsiderationsometimes
overlookedinengineeringanalysesisthereboundeffectthecostsavinginducesahigherrateof
equipmentusage(seeSection3.9.5).Theanalysesmayoverlookheterogeneityamongconsumers:
whatappearsattractivefortheaverageconsumermaynotbeattractiveforall(ormany)consumers,
basedondifferencesintheircircumstancesandpreferences.Oneapproachtovalidationisto
examineenergyefficiencyprogramsandcompareexanteestimatesofefficiencyopportunitieswith
expostaccomplishment;theevidencefromsuchcomparisonsappearstobeinconclusive,though
moreanalysismaybefruitful.
51
Economicexplanationsfortheapparentfailuretopursueprofitablemitigation/energysaving
opportunitiesincludethefollowing.
52
Givenuncertaintyandriskaversion,consumersmayrationally
desireahigherreturnascompensation.Priceuncertaintyandtheirreversibilityofinvestmentmay
alsoposeadditionaleconomicbarrierstothetimingofadoptionitmaypaytowaitbeforemaking
theinvestment(HassettandMetcalf,1993;Metcalf,1994).Mitigationinvestmentstaketimetopay
off,andconsumersactasiftheyareemployinghighdiscountrateswhenevaluatingsuch
investments(Hausman,1979).Theseconsumerdiscountratesmightbemuchhigherthanthoseof
commercialbusinesses,reflectingliquidityandcreditconstraints.Thedurabilityoftheexisting
capitalstockcanbeabarriertorapiddeploymentofotherwiseprofitablenewtechnologies.Also,a
principalagentproblemariseswhenthepartythatpaysforanenergyefficiencyinvestmentdoesnt
captureallthebenefits,orviceversa.Forexampleatenantinstallsanefficientrefrigerator,butthe
landlordretainsownershipwhenthetenantleaves(splitincentives).Orthelandlordbuysa
refrigeratorbutdoesntcareaboutitsenergyefficiency.Suchproblemscanalsoarisein
organizationswheredifferentactorsareresponsible,say,forenergybillsandinvestmentaccounts.
53
Finally,energyusers,especiallyresidentialusers,maybeuninformed,orpoorlyinformed,aboutthe
energysavingstheyareforgoing.Insomecases,theselleroftheproducthasbetterinformation
thanthepotentialbuyer(asymmetricinformation)andmayfailtoconveythatinformationcredibly
(Bardhanetal.,2013).
Recently,someeconomistshavesuggestedthatsystematicbehavioralbiasesindecisionmakingcan
causeafailuretomakeotherwiseprofitableinvestment.Thesehavebeenclassifiedasnonstandard
beliefs(e.g.,incorrectassessmentsoffuelsavingsAllcott,2013),nonstandardpreferences(e.g.,
lossaversionGreeneetal.,2009),andnonstandarddecisionmaking(e.g.,taxsalienceChettyet
al.,2009).Suchphenomenacangiverisetowhatmightbeconsideredmisoptimizationbydecision
makers,whichinturncouldcreatearoleforefficiencyimprovingpolicynotmotivatedby
conventionalmarketfailures(Allcottetal.,forthcoming);seeSection3.10.1forafulleraccount.
Insummary,whetheropportunitiesformitigationatnegativeprivatecostexistisultimatelyan
empiricalquestion.Botheconomicandnoneconomicreasonscanexplainwhytheymightexist,as
notedinrecentreviews(Huntington,2011;MurphyandJaccard,2011;AllcottandGreenstone,
2012;GillinghamandPalmer,2014).But,evidencealsosuggeststhattheoccurrenceofnegative
51
Arimuraetal(2012)reviewUSelectricityindustryconservationprogrammes(demandsidemanagement
DSM)andconcludethatprogrammessavedenergyatameancostofUSD0.05perkWh,witha90%
confidenceintervalofUSD0.003toUSD0.010.AllcottandGreenstone(2012)concludethatthisaveragecost
isbarelyprofitable.Althoughthismaybetrue,onecannotconcludethatonthisevidencealonethatexante
engineeringestimatesofcostsweretoooptimistic.
52
AllcottandGreenstone(2012)andGillinghamandPalmer(2014)provideexcellentreviews.
53
Davis(2011)andGillinghametal(2012)provideevidenceofprincipalagentproblemsinresidentialenergy,
althoughamountofenergylostasaresultwasnotlargeinthecasesexamined.
60of128

privatecostsissometimesoverstated,forreasonsidentifiedabove.Thisremainsanactiveareaof
researchanddebate.
3.9.4 Socialcostofcarbon
AlthoughestimatesofaggregatedamagesfromclimatechangeareusefulinformulatingGHG
mitigationpolicies(despitethecaveatslistedinSection3.9.2),theyareoftenneededformore
mundanepolicyreasons.Governmentshavetomakedecisionsaboutregulationwhenimplementing
energypolicies,suchasonfuelorEEstandardsforvehiclesandappliances.Thesocialcostofcarbon
emissionscanbefactoredintosuchdecisions.
Tocalculatethesocialcost,considerabaselinetrajectoryofemissions(E
0
,,E
t
)thatresultsina
trajectoryoftemperaturechanges,T
t
.Supposeadamagefunctionforyeartisdiscountedtothe
presentandcalledD(T
t
),asdiscussedinEquation3.9.2.Thesetrajectoriesresultinadiscounted
presentvalueofdamages:
Equation3.9.2.
0
( )
t
PVD D T dt
A
}

Thentakethederivativewithrespecttoasmallchangeinemissionsatt=0,E
0
,tomeasuretheextra
costassociatedwithaonetonneincreaseinemissionsattime0(thatis,theincrementinPVD):
Equation3.9.3.
0
E
PVD
MDCC
c
c
=
.
WhenappliedtoCO
2
thisequationgivesthemarginaldamagefromthechangeinclimatethat
resultsfromanextratonneofcarbon.Itisalsocalledthesocialcostofcarbon(SCC).Itshouldbe
emphasizedthatthecalculationofSCCishighlysensitivetotheprojectedfuturetrajectoryof
emissionsandalsoanycurrentorfutureregulatoryregime.
54
Becauseofitspotentialuseinformulatingclimateorenergyregulatorypolicy,governmentshave
commissionedestimatesofSCC.Since2002,anSCCvaluehasbeenusedinpolicyanalysisand
regulatoryimpactassessmentintheUnitedKingdom(ClarksonandDeyes,2002).Itwasrevisedin
2007and2010.In2010,astandardizedrangeofSCCvaluesbasedonsimulationswithDICE,FUND,
andPAGEusingalternativeprojectionsofemissionsandalternativediscountrates,wasmade
availabletoallU.S.Governmentagencies.
55
Itwasupdatedin2013(USInteragencyWorkingGroup,
2013).
3.9.5 TheReboundeffect
Technologicalimprovementsinenergyefficiency(EE)havedirecteffectsonenergyconsumptionand
thusGHGemissions,butcancauseotherchangesinconsumption,production,andpricesthatwill,
inturn,affectGHGemissions.Thesechangesaregenerallycalledreboundortakebackbecausein
mostcasestheyreducethenetenergyoremissionsreductionassociatedwiththeefficiency
improvement.Thesizeofreboundiscontroversial,withsomeresearchpaperssuggestinglittleorno
reboundandothersconcludingthatitoffsetsmostorallreductionsfromEEpolicies(Greeningetal.,
2000;Binswanger,2001;Gillinghametal.,2013,summarizetheempiricalresearch).TotalEE
54
SomeambiguityregardsthedefinitionoftheSCCandthecorrectwaytocalculateitinthecontextofan
equilibriumIAM(intermsofdistinguishingbetweenamarginalchangeinwelfarevs.amarginalchangein
damageonly).See,forinstance,anaccountoftheinitialU.S.Governmenteffort(Greenstoneetal.,2013).
55
Obviously,estimatesoftheSCCaresensitivetothestructuralanddataassumptionsinthemodelsusedto
computetheSCC.Weitzman(2013),forinstance,demonstratesthesignificanceofthediscountrateinthe
calculation.
61of128

reboundcanbebrokendownintothreedistinctparts:substitutioneffect,incomeeffect,and
economywide.
Inenduseconsumption,substitutioneffectrebound,ordirectreboundassumesthataconsumer
willmakemoreuseofadeviceifitbecomesmoreenergyefficientbecauseitwillbecheapertouse.
SubstitutioneffectreboundextendstoinnovationstriggeredbytheimprovedEEthatresultsinnew
waysofusingthedevice.Topayforthatextrause,theindividualmuststillconsumelessof
somethingelse,sonetsubstitutioneffectreboundisthedifferencebetweentheenergyexpended
inusingmoreofthedeviceandtheenergysavedfromusingwhateverwaspreviouslyusedless(see
ThomasandAzevedo,2013).
Incomeeffectreboundorindirectrebound,arisesiftheimprovementinEEmakestheconsumer
wealthierandleadsthemtoconsumeadditionalproductsthatrequireenergy.Evenifenergy
efficientlightbulbsleadtonosubstitutioneffectrebound(morelighting),incomeeffectrebound
wouldresultiftheconsumerspendsthenetsavingsfrominstallingthebulbsonnewconsumption
thatusesenergy.TheincomeeffectreboundwillreflectthesizeoftheincomesavingsfromtheEE
improvementandtheenergyintensityofmarginalincomeexpenditures.
AnalogousreboundeffectsforEEimprovementsinproductionaresubstitutiontowardsaninput
withimprovedenergyefficiency,andsubstitutionamongproductsbyconsumerswhenanEE
improvementchangestherelativepricesofgoods,aswellasanincomeeffectwhenanEE
improvementlowersproductioncostsandcreatesgreaterwealth.
Economywidereboundreferstoimpactsbeyondthebehaviouroftheentitybenefitingdirectly
fromtheEEimprovement,suchastheimpactofEEonthepriceofenergy.Forexample,improved
fueleconomylowersvehicleoildemandandpricesleadingsomeconsumerstoraisetheir
consumptionofoilproducts.Thesizeofthisenergypriceeffectwillbegreaterwithlesselastic
supplyandmoreelasticdemand.Somearguethatthemacroeconomicmultipliereffectsofawealth
shockfromEEimprovementalsocreateeconomywiderebound.
Reboundissometimesconfusedwiththeconceptofeconomicleakage,whichdescribesthe
incentiveforemissionsintensiveeconomicactivitytomigrateawayfromaregionthatrestricts
GHGs(orotherpollutants)towardsareaswithfewerornorestrictionsonsuchemissions.Energy
efficiencyreboundwilloccurregardlessofhowbroadlyornarrowlythepolicychangeisadopted.As
withleakage,however,thepotentialforsignificantreboundillustratestheimportanceof
consideringthefullequilibriumeffectsofapolicydesignedtoaddressclimatechange.
3.9.6 Greenhousegasemissionsmetrics
Thepurposeofemissionsmetricsistoestablishanexchangerate,thatis,toassignrelativevalues
betweenphysicallyandchemicallydifferentGHGsandradiativeforcingagents(Fuglestvedtetal.,
2003;Plattneretal.,2009).Forinstance,perunitmass,CH
4
isamorepotentGHGthanCO
2
interms
ofinstantaneousradiativeforcing,yetitoperatesonashortertimescale.Inapurelytemporal
sense,theimpactsaredifferent.Therefore,howshouldmitigationeffortsbeapportionedfor
emissionsofdifferentGHGs?
56
GHGemissionsmetricsarerequiredforgeneratingaggregateGHGemissionsinventories;to
determinetherelativepricesofdifferentGHGsinamultigasemissionstradingsystem;fordesigning
multigasmitigationstrategies;orforundertakinglifecycleassessment(e.g.,Petersetal.,2011b).
SincemetricsquantifythetradeoffsbetweendifferentGHGs,anymetricusedformitigation
strategiesexplicitlyorimplicitlyevaluatestheclimateimpactofdifferentgasesrelativetoeach
other.
56
ThisissueisdiscussedinChapter8ofWGI.
62of128

ThemostprominentGHGemissionsmetricistheGlobalWarmingPotential(GWP),whichcalculates
theintegratedradiativeforcingfromtheemissionofonekilogramofacomponentjouttoatime
horizonT:
Equation3.9.4. A0wP
]
(I) = ]
1
0
RF
]
(t) Jt,
TheAGWPisanabsolutemetric.ThecorrespondingrelativemetricisthendefinedasGWP
j
=AGWP
j
/AGWP
CO2
.
TheGWPwithafinitetimehorizonTwasintroducedbytheIPCC(1990).Witha100yeartime
horizon,theGWPisusedintheKyotoProtocolandmanyotherscientificandpolicyapplicationsfor
convertingemissionsofvariousGHGsintoCO
2
equivalents.AspointedoutinWGI,noscientific
argumentfavoursselecting100yearscomparedwithotherchoices.Conceptualshortcomingsofthe
GWPinclude:(a)thechoiceofafinitetimehorizonisarbitrary,yethasstrongeffectsonmetric
value(IPCC,1990);(b)thesameCO
2
equivalentamountofdifferentgasesmayhavedifferent
physicalclimateimplications(Fuglestvedtetal.,2000b;ONeill,2000;SmithandWigley,2000);(c)
physicalimpactsandimpactstohumans(wellbeing)aremissing;and(d)temporalaggregationof
forcingdoesnotcaptureimportantdifferencesintemporalbehaviour.Limitationsand
inconsistenciesalsorelatetothetreatmentofindirecteffectsandfeedbacks(seeWGI,Chapter8).
Manyalternativemetricshavebeenproposedinthescientificliterature.Itcanbearguedthatthe
netimpactsfromdifferentgasesshouldbecompared(whenmeasuredinthesameunits)andthe
relativeimpactusedfortheexchangerate.TheGlobalDamagePotential(GDamP)followsthis
approachbyusingclimatedamagesasanimpactproxy,andexponentialdiscountingforinter
temporalaggregationofimpacts(Hammittetal.,1996b;Kandlikar,1996b).Sincemarginaldamages
dependonthetimeatwhichGHGsareemitted,theGDamPisatimevariantmetric.TheGDamP
accountsforthefullcausalchainfromemissionstoimpacts.Oneadvantageoftheframeworkisthat
relevantnormativejudgements,suchasthechoiceofintertemporaldiscountingandthevaluation
ofimpacts,areexplicit(Deuberetal.,2013).Inpractice,however,theGDamPisdifficultto
operationalize.ThedifficultiesincalculatingtheGDamPandSCCarecloselyrelated(seeSection
3.9.4).
TheGlobalCostPotential(GCP)calculatesthetimevaryingratioofmarginalabatementcostsof
alternativegasesarisinginacosteffectivemultigasmitigationstrategygivenaprescribedclimate
target(ManneandRichels,2001),suchasacapontemperaturechangeoronGHGconcentrations.
WhiletheGCPavoidstheproblemsassociatedwithdamagefunctions,itstillrequirescomplex
integratedenergyeconomyclimatemodelstocalculateGHGpriceratios,andisthereforeless
transparenttostakeholdersthanphysicalmetrics.
57
ThetimedependantGlobalTemperatureChangePotential(GTP)isaphysicalmetricthatdoesnot
involveintegrationofthechosenimpactparameterovertime(Shineetal.,2007).Itisdefinedasthe
relativeeffectofdifferentgasesontemperatureatapredefinedfuturedatefromaunitimpulseof
thosegases.Typicallythesearenormalizedtoabase,suchassamemassofCO
2
emitted.Whilethe
GWPandGTPwerenotconstructedwithaspecificpolicytargetinmind,theGCPisconceptually
moreconsistentwithapolicyapproachaimingatachievingclimateobjectivesinacosteffectiveway
(Fuglestvedtetal.,2003;ManningandReisinger,2011;Toletal.,2012).
Virtuallyallabsolutemetrics(AM
j
)canbeexpressedintermsofageneralizationofEquation3.9.4.
(Kandlikar,1996b;Forsteretal.,2007):
Equation3.9.5. AH
]
= ] I
]
(AI(t), RF(t), ) w(t) Jt
0
,
57
Inthecontextofamultigasintegratedassessmentmodelwhichseekstominimizethecostofmeetinga
climatetarget.
63of128

wheretheimpactfunctionI
j
linksthemetrictothechangeinaphysicalclimateparameter,typically
theglobalmeanradiativeforcingRF(e.g.,inthecaseoftheGWP)orthechangeinglobalmean
temperatureAT(e.g.,GTPandmostformulationsoftheGDamP).Insomecases,theimpactfunction
alsoconsiderstherateofchangeofaphysicalclimateparameter(ManneandRichels,2001;
Johanssonetal.,2006).
Thetemporalweightingfunction,W(t),determineshowthemetricaggregatesimpactsovertime.It
canprescribeafinitetimehorizon(GWP),evaluationatadiscretepointintime(GTP),orexponential
discountingoveraninfinitetimehorizon(GDamP),whichisconsistentwiththestandardapproach
tointertemporalaggregationusedineconomics(seeSection3.6.2).Theweightingusedinthe
GWPisaweightequaltooneuptothetimehorizonandzerothereafter.
Thecategorizationaccordingtotheirchoiceofimpactandtemporalweightingfunction(Table3.4)
servestoexposeunderlyingexplicitandimplicitassumptions,which,inturn,mayreflectnormative
judgements.Italsohelpstoidentifyrelationshipsbetweendifferentmetricconcepts(Toletal.,
2012;Deuberetal.,2013).Inessence,thechoiceofanappropriatemetricforpolicyapplications
involvesatradeoffbetweencompleteness,simplicity,measurability,andtransparency(Fuglestvedt
etal.,2003;Plattneretal.,2009;Deuberetal.,2013).TheGDPandGCParecosteffectivein
implementingmultigasmitigationpolicies,butaresubjecttolargemeasurability,valuebased,and
scientificuncertainties.Simplephysicalmetrics,suchastheGWP,areeasiertocalculateand
produceamoretransparentresult,butareinaccurateinrepresentingtherelevantimpacttradeoffs
betweendifferentGHGs(Fuglestvedtetal.,2003;Deuberetal.,2013).
ThechoiceofmetriccanhaveastrongeffectonthenumericalvalueofGHGexchangerates.Thisis
particularlyrelevantforCH
4
,whichoperatesonamuchshortertimescalethanCO
2
.InWGI,Section
8.7,anexchangeratioofCH
4
toCO
2
of28isgivenforGWPandof4foratimehorizonof100years
forGTP.
58
Foraquadraticdamagefunctionandadiscountrateof2%,Boucher(2012)obtaineda
medianestimateoftheGDamPexchangeratiosof24.3.Thisexchangerateobviouslyhasvery
significantimplicationsforrelativeemphasisacountrymayplaceonmethanemitigationvs.carbon
dioxidemitigation.
Asmallbutincreasingbodyofliteraturerelatestotheeconomicimplicationsofmetricchoice.A
limitednumberofmodelbasedexaminationsfindthat,despiteitsconceptualshortcomings,the
GWP100performsroughlysimilarlytoGTPoracostoptimizingmetric(suchastheGCP)intermsof
aggregatecostsofreachingaprescribedclimatetarget,althoughregionalandsectoraldifferences
maybesignificant(GodalandFuglestvedt,2002;Johanssonetal.,2006;Reisingeretal.,2013;Smith
etal.,2013;Ekholmetal.,2013).Inotherwords,basedonthesefewstudies,thescopeforreducing
aggregatemitigationcostsofreachingaparticularclimatetargetbyswitchingtoametricotherthan
thecurrentlyusedGWP100maybelimited,althoughtheremaybesignificantdifferencesinterms
ofregionalcosts.
IntheKyotoProtocol,emissionreductionsofoneGHGcanbetradedwithreductionsinallother
GHGs.SuchsinglebasketapproachesimplicitlyassumethattheGHGscanlinearlysubstituteeach
otherinthemitigationeffort.However,thesameCO
2
equivalentamountofdifferentGHGscan
resultinclimateresponsesthatareverydifferentfortransitionalandlongtermtemperature
change,chieflyduetodifferentlifetimesofthesubstances(Fuglestvedtetal.,2000a;Smithand
Wigley,2000).Asanalternative,multibasketapproacheshavebeenproposed,whichonlyallow
tradingwithingroupsofforcingagentswithsimilarphysicalandchemicalproperties(Rypdaletal.,
2005;Jackson,2009;Danieletal.,2012;Smithetal.,2013).Smithetal.(2013)proposea
methodologyforcategorizingGHGsintotwobasketsof(a)longlivedspecies,forwhichthe
cumulativeemissionsdeterminethelongtermtemperatureresponse,and(b)shorterlivedspecies
58
SeeWGIChapter8,Appendix8AforGWPandGTPvaluesforanextensivelistofcomponents.
64of128

forwhichsustainedemissionsmatter.Applyingseparateemissionequivalencemetricsand
regulationstoeachofthetwobasketscaneffectivelycontrolthemaximumpeaktemperature
reachedunderaglobalclimatepolicyregime.However,furtherresearchontheinstitutional
requirementsandeconomicimplicationsofsuchanapproachisneeded,asitrequiresregulatorsto
agreeonseparatecapsforeachbasketandreducestheflexibilityofemissiontradingsystemsto
harvestthecheapestmitigationoptions.
Table 3.4. Overview and classification of different metrics from the scientific literature
Name of metric
Impact
function
Atmospheric
background
Time dimension Reference
GWP
Global Warming
Potential
RF Constant
Constant temporal
weighting over fixed
time horizon
IPCC (1990)
GWP-LA
Global Warming
Potential
(discounting)
RF
Constant, average of
future conditions
Exponential
discounting
Lashof and
Ahuja (1990)
GTP-H
Global Temperature
Change Potential
(fixed time horizon)
T Constant
Evaluation at a fixed
time T after emission
Fuglestvedt et
al., (2010),
Shine et al.
(2005)
GTP(t)
Time-dependent
global temperature
change potential
T Time-varying
Evaluation at a fixed
end point time in the
future
Shine et al.
(2007)
CETP
Cost Effective
Temperature
Potential
T Exogenous scenario
complex function of
time when climate
threshold is reached
Johannson
(2012)
MGTP
Mean Global
Temperature
Change Potential
T Time-varying
Constant temporal
weighting over fixed
time horizon
Gillet and
Mathews
(2010), Peters
et al (2011a)
GCP
Global Cost
Potential
Infinite damage
above climate
target
Time-varying
Exponential
discounting
Manne and
Richels (2001)
GDamP
Global Damage
Potential
D(T) Time-varying
Exponential
discounting
Kandlikar
(1996a),
Hammit et al.
(1996a)
3.10 Behaviouraleconomicsandculture
Thissectionsummarizesbehaviouraleconomicsrelatedtoclimatechangemitigation.Wefocuson
systematicdeviationsfromthetraditionalneoclassicaleconomicmodel,whichassumesthat
preferencesarecomplete,consistent,transitive,andnonaltruistic,andthathumanshave
unboundedcomputationalcapacityandrationalexpectations.Inthiscontext,socialandcultural
issuesandconditionsthatframeourattitudes,aswellaslivingconditions,arealsoaddressed.
Chapter2alsoconsidersbehaviouralquestions,thoughprimarilyinthecontextofriskand
uncertainty.
Althoughthefocusisonthebehaviourofindividuals,somefirmsandorganizationsalsotakeactions
thatappeartobeinconsistentwiththestandardneoclassicalmodeloftheprofitmaximizingfirm
(LyonandMaxwell,2007).
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3.10.1 Behaviouraleconomicsandthecostofemissionsreduction
Behaviouraleconomicsdealswithcognitivelimitations(andabilities)thataffectpeopleseconomic
decisionmakingprocesses.Choicescanbeaffectedand/orframedbyperceivedfairness,social
norms,cooperation,selfishness,andsoon.
59
Behaviouraleconomicsemphasizesthecognitive,
social,andemotionalfactorsthatleadtoapparentlyirrationalchoices.Agrowingnumberof
documentedsystematicdeviationsfromtheneoclassicalmodelhelpexplainpeoplesbehaviour,but
herewefocusonseveralthatweseeasmostrelevanttoclimatechangemitigation.
60
3.10.1.1 Consumerundervaluationofenergycosts
Consumersmayundervalueenergycostswhentheypurchaseenergyusingdurables,suchas
vehicles,ormakeotherinvestmentdecisionsrelatedtoenergyuse.
61
Byundervalue,wemeanthat
consumerschoicessystematicallyfailtomaximizetheutilitytheyexperiencewhenthechoicesare
implemented(experiencedutility)(KahnemanandSugden,2005;seealso,e.g.,Fleurbaey,2009).
ThismisoptimizationreducesdemandforEE.Threepotentialmechanismsofundervaluationmaybe
mostinfluential(seealsoBox3.10).First,whenconsideringachoicewithmultipleattributes,
evidencesuggeststhatconsumersareinattentivetoaddoncostsandancillaryattributes,suchas
shippingandhandlingchargesorsalestaxes(HossainandMorgan,2006;Chettyetal.,2009).It
couldbethatEEisasimilartypeofancillaryproductattributeandisthuslesssalientatthetimeof
purchase.Second,significantevidenceacrossmanycontextsalsosuggeststhathumansarepresent
biased(DellaVigna,2009).Ifenergycostsaffectconsumptioninthefuturewhilepurchaseprices
affectconsumptioninthepresent,thiswouldleadconsumerstobelessenergyefficient.Third,
peoplesbeliefsabouttheimplicationsofdifferentchoicesmaybesystematicallybiased(Jensen,
2010;Bollingeretal.,2011;Klingetal.,2012;McKenzieetal.,2013).Attarietal.(2010)showthat
peoplesystematicallyunderestimatetheenergysavingsfromasetofhouseholdenergyconserving
activities,andAllcott(2013)showsthattheaverageconsumereithercorrectlyestimatesor
systematicallyslightlyunderestimatesthefinancialsavingsfrommorefuelefficientvehicles.Eachof
thesethreemechanismsofundervaluationappearsplausiblebasedonresultsfromothercontexts.
However,rigorousevidenceofmisoptimizationislimitedinthespecificcontextofenergydemand
(AllcottandGreenstone,2012).
Threeimplicationsariseforclimateandenergypolicyiftheaverageconsumerwhoismarginaltoa
policydoes,infact,undervalueenergycosts.Thefirstisaninternalitydividendfromcarbontaxes
(orotherpoliciesthatinternalizethecarbonexternalityintoenergyprices):acarbontaxcanactually
increaseconsumerwelfarewhenconsumersundervalueenergycosts(Allcottetal.,forthcoming).
ThisoccursbecauseundervaluationwouldbeapreexistingdistortionthatreducesdemandforEE
belowconsumersprivateoptima,andonethatincreasingcarbontaxeshelpstocorrect.Second,in
additiontocarbontaxes,othertaxorsubsidypoliciesthatraisetherelativepurchasepriceof
energyinefficientdurablegoodscanimprovewelfare(CropperandLaibson,1999;ODonoghueand
Rabin,2008;Fullertonetal.,2011).Third,welfaregainsarelargestfrompoliciesthatpreferentially
targetconsumerswhoundervalueenergycoststhemost.Thiseffectisrelatedtothebroader
philosophiesoflibertarianpaternalism(SunsteinandThaler,2003)andasymmetricpaternalism
(Camereretal.,2003),whichadvocatepoliciesthatdonotinfringeonfreedomofchoicebutcould
improvechoicesbythesubsetofpeoplewhomisoptimize.Inthecontextofenergydemand,such
59
See,e.g.,BabcockandLoewenstein(1997),ShivandFedorikhin(1999),Asheimetal.(2006),Barrett(2007),
Levatietal.(2007),Pottersetal.(2007),ShogrenandTaylor(2008)andDannenbergetal.(2010).
60
SeeRachlinksi(2000),BrekkeandJohanssonStenmann(2008),Gowdy(2008)andtheAmerican
PsychologicalAssociation(2010).
61
Thiscanevenapplytocasesthatusesophisticatedmethodstosupportdecisions(e.g.,KorpiandAlaRisku,
2008).
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policiesmightincludelabelsorprogrammesthatprovideinformationabout,andattractattention
to,energyusebydurablegoods.
3.10.1.2 Firmbehaviour
Someofthephenomenadescribedabovemayalsoapplytofirms.LyonandMaxwell(2004,2008)
examineindetailthetendencyoffirmstoundertakeproenvironmentactions,suchasmitigation,
withoutbeingpromptedbyregulation.Takinganeoclassicalapproachtotheproblem,theyfindthat
firmsviewavarietyofproenvironmentactionsasbeingtotheiradvantage.However,evidenceofa
compliancenormhasbeenfoundinothercontextswherefirmsresponsestoregulationhavebeen
studied(AyresandBraithwaite,1992;Gunninghametal.,2003).
Theconventionaleconomicmodelrepresentsthefirmasasingle,unitarydecisionmaker,witha
singleobjective,namely,profitmaximization.Asanalternativetothisblackboxmodelofthefirm
(Malloy,2002),thefirmmaybeseenasanorganizationwithamultiplicityofactors,perhapswith
differentgoals,andwithcertaindistinctiveinternalfeatures(Coase,1937;CyertandMarch,1963;
Williamson,1975).
3.10.1.3 Nonpriceinterventionstoinducebehaviouralchange
Besidescarbontaxesandotherpoliciesthataffectrelativeprices,othernonpricepolicyinstruments
canreduceenergydemand,and,therefore,carbonemissions.Suchinterventionsincludesupplying
informationonpotentialsavingsfromenergyefficientinvestment,drawingattentiontoenergyuse,
andprovidingconcreteexamplesofenergysavingmeasuresandactivities(e.g.,Stern,1992;
Abrahamseetal.,2005).Theyalsoincludeprovidingfeedbackonhistoricalenergyconsumption
(Fischer,2008)andinformationonhowpersonalenergyusecomparestoasocialnorm(Allcott,
2011).
62
Insomecases,nonpriceenergyconservationandefficiencyprogrammesmayhavelowcoststothe
programmeoperator,anditisthereforearguedthattheyarepotentialsubstitutesifcarbontaxes
arenotpoliticallyfeasible(Guptaetal.,2007).However,itisquestionablewhethersuch
interventionsareappropriatesubstitutesforcarbontaxes,forexample,intermsofenvironmental
andcosteffectiveness,becausetheirimpactmaybesmall(Gillinghametal.,2006)andunaccounted
costsmayreducethetruewelfaregains.Forexample,consumersexpendituresonenergyefficient
technologiesandtimespentturninglightsoffmaynotbeobserved.
Researchinotherdomains(e.g.,Bertrandetal.,2010)hasshownthatapersonschoicesare
sometimesnotconsistent.Theymaybemalleablebyancillaryconditionsnoninformational
factorsthatdonotaffectexperiencedutility.InthecontextofEE,thiscouldimplythatenergy
demandmaybereducedwithrelativelylowwelfarecoststhroughpublicityaimedatchanging
consumerpreferences.However,publiclyfundedpersuasioncampaignsbringupimportantethical
andpoliticalconcerns,andtheeffectivenessofawarenessraisingprogrammesonenergyand
carbonwilldependonhowconsumersactuallyusetheinformationandthemixofpolicy
instruments(Gillinghametal.,2006;Guptaetal.,2007;alsoWorrelletal.,2004;Mundacaetal.,
2010).
3.10.1.4 Altruisticreductionsofcarbonemissions
Inmanycontexts,peoplearealtruistic,beingwillingtoreducetheirownwelfaretoincreasethatof
others.Forexample,inlaboratorydictatorgames,peoplevoluntarilygivemoneytoothers
(Forsytheetal.,1994),andparticipantsinpublicgoodsgamesregularlycontributemorethanthe
privatelyoptimalamount(DawesandThaler,1988;Ledyard,1993).Charitabledonationsinthe
62
Theefficacyoftheseinterventionscanoftenbeexplainedwithinneoclassicaleconomicmodels.Froman
expositionalperspective,itisstillrelevanttocovertheminthissection.
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UnitedStatesamounttomorethan2%ofGDP(List,2011).Similarly,manyindividualsvoluntarily
contributetoenvironmentalpublicgoods,suchasreducedcarbonemissions.Forexample,USD387
millionwerespentintheU.S.onvoluntarycarbonoffsetpurchasesin2009(Bloomberg,2010).
Preexistingaltruisticvoluntarycarbonemissionreductionscouldmoderatetheeffectsofanew
carbontaxonenergydemandbecausetheintroductionofmonetaryincentivescancrowdout
altruisticmotivations(Titmuss,1970;FreyandOberholzerGee,1997;GneezyandRustichini,2000).
Thus,acarbontaxcouldreducevoluntarycarbonemissionreductionsevenasitincreases
financiallymotivatedreductions.Whilethiseffectmightnotweakenthewelfareargumentfora
carbontax,itdoesreducetheelasticityofcarbonemissionswithrespecttoacarbontax.
Reciprocity,understoodasthepracticeofpeoplerewardinggenerosityandcastigatingcruelty
towardsthem,hasbeenfoundtobeakeydriverofvoluntarycontributionstopublicgoods.Positive
reciprocitycomesintheformofconditionalcooperation,whichisatendencytocooperatewhen
othersdosotoo(Axelrod,1984;Fischbacheretal.,2001;FreyandMeier,2004).However,
cooperationbasedonpositivereciprocityisoftenfragileandisdecliningovertime(Boltonetal.,
2004;FischbacherandGchter,2010).Incentivesandpenaltiesarefundamentaltomaintaining
cooperationinenvironmentaltreaties(Barrett,2003).Addingastrategicoptiontopunishdefectors
oftenstabilizescooperation,evenwhenpunishmentcomesatacosttopunishers(Ostrometal.,
1992;FehrandGchter,2002).Yet,ifagentsareallowedtocounterpunish,theeffectivenessof
reciprocitytopromotecooperationmightbemitigated(Nikiforakis,2008).However,most
laboratorystudieshavebeenconductedundersymmetricconditionsandlittleisknownabout
humancooperationinasymmetricsettings,whichtendtoimposemoreseriousnormativeconflicts
(Nikiforakisetal.,2012).
Experimentsalsorevealaparadox:actorscanagreetoacombinednegotiatedclimategoalfor
reducingtheriskofcatastrophe,butbehaveasiftheywereblindtotherisks(Barrettand
Dannenberg,2012).Peoplearealsooftenmotivatedbyconcernsaboutthefairnessofoutcomes
andprocedures;inparticular,manydonotlikefallingbehindothers(FehrandSchmidt,1999;Bolton
andOckenfels,2000;CharnessandRabin,2002;Boltonetal.,2005).Suchconcernscanboth
promoteandhampertheeffectivenessofnegotiations,includingclimatenegotiations,in
overcomingcooperationanddistributionalproblems(Gthetal.,1982;LangeandVogt,2003;Lange
etal.,2007;Dannenbergetal.,2010).
Uncertaintyaboutoutcomesandbehavioursalsotendstohampercooperation(Gangadharanand
Nemes,2009;AmbrusandGreiner,2012).Asaresult,theinformationgivento,andexchangedby,
decisionmakersmayaffectsocialcomparisonprocessesandreciprocalinteraction,andthusthe
effectivenessofmechanismstoresolveconflicts(Goldsteinetal.,2008;Chenetal.,2010;Boltonet
al.,2013).Inparticular,facetofacecommunicationhasbeenprovedtosignificantlypromote
cooperation(Ostrom,1990;Brosigetal.,2003).Concernsaboutfreeridingareperceivedasa
barriertoengaginginmitigationactions(Lorenzonietal.,2007).Theimportanceoffairnessin
promotinginternationalcooperation(seealsoChapter4)isoneofthefewnonnormative
justificationsforfairnessinclimatepolicy.
3.10.1.5 Humanabilitytounderstandclimatechange
Sofar,wehavecovereddeviationsfromtheneoclassicalmodelthataffectenergydemand.Such
deviationscanalsoaffectthepolicymakingprocess.Theunderstandingofclimatechangeasa
physicalphenomenonwithlinkstosocietalcausesandimpactsishighlycomplex(WeberandStern,
2011).Somedeviationsarebehaviouralandaffectperceptionsanddecisionmakinginvarious
settingsbesidesclimatechange.(SeeSection2.4forafullerdiscussion).Forexample,perceptions
of,andreactionsto,uncertaintyandriskcandependnotonlyonexternalreality,asassumedinthe
neoclassicalmodel,butalsooncognitiveandemotionalprocesses(Section2.4.2).Whenmaking
decisions,peopletendtooverweightoutcomesthatareespeciallyavailableorsalient(Kahneman
andTversky,1974,1979).Theyaremoreaversetolossesthantheyareinterestedingainsrelativeto
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areferencepoint(KahnemanandTversky,1979).Becauseclimatechangeinvolvesalossofexisting
environmentalamenities,thiscanincreaseitsperceivedcosts.However,ifthecostsofabatement
areseenasareductionrelativetoareferencerateoffutureeconomicgrowth,thiscanincreasethe
perceivedcostsofclimatechangemitigation.
Somefactorsmakeithardforpeopletothinkaboutclimatechangeandleadthemtounderweight
it:changehappensgradually;themajoreffectsarelikelytooccurinthedistantfuture;theeffects
willbefeltelsewhere;andtheirnatureisuncertain.Furthermore,weatherisnaturallyvariable,and
thedistinctionbetweenweatherandclimateisoftenmisunderstood(Reynoldsetal.,2010).
Peoplesperceptionsandunderstandingofclimatechangedonotnecessarilycorrespondto
scientificknowledge(Section2.4.3)becausetheyaremorevulnerabletoemotions,values,views,
and(unreliable)sources(WeberandStern,2011).Peoplearelikelytobemislediftheyapplytheir
conventionalmodesofunderstandingtoclimatechange(Bostrometal.,1994).
3.10.2 Socialandculturalissues
Inrecentyears,theorientationofsocialprocessesandnormstowardsmitigationeffortshasbeen
seenasanalternativeorcomplementtotraditionalmitigationactions,suchasincentivesand
regulation.Weaddresssomeoftheconceptsdiscussedintheliterature,which,fromasocialand
culturalperspective,contributetostrengtheningclimatechangeactionsandpolicies.
3.10.2.1 Customs
Inbothdevelopedanddevelopingcountries,governments,socialorganizations,andindividualshave
triedtochangeculturalattitudestowardsemissions,energyuse,andlifestyles(European
Commission,2009).Forexample,householdenergyusepatternsforspaceandwaterheatingdiffer
significantlybetweenJapanandNorwaybecauseoflifestyledifferences(Wilhiteetal.,1996;Gram
Hanssen,2010).Somehavearguedthatthebioculturalheritageofindigenouspeoplesisaresource
thatshouldbevaluedandpreservedasitconstitutesanirreplaceablebundleofteachingsonthe
practicesofmitigationandsustainability(SheridanandLongboat,2006;RussellSmithetal.,2009;
KronikandVerner,2010).Sometimeslocalstrategiesandindiceshavemetamorphosedintonational
policies,asinthecaseofBuenVivirinEcuador(Choquehuanca,2010;Gudynas,2011)andGross
NationalHappiness(GNH),describedinBox3.11.Inrichcountries,andamongsocialgroupswith
highlevelsofenvironmentalawareness,interestinsustainabilityhasgivenrisetocultural
movementspromotingchangeinmodesofthought,production,andconsumption.Includingthe
culturaldimensioninmitigationpoliciesfacilitatessocialacceptability.
Box 3.11Gross National Happiness (GNH)

TheKingdomofBhutanhasadoptedanindexofGNHasatoolforassessingnationalwelfareand
planningdevelopment(KingdomofBhutan,2008).Accordingtothisconcept,happinessdoesnot
derivefromconsumption,butratherfromfactorssuchastheabilitytoliveinharmonywithnature
(Taplinetal.,2013).Thus,GNHisbothacritiqueof,andanalternativeto,theconventionalglobal
developmentmodel(Taplinetal.,2013).TheGNHIndexmeasureswellbeingandprogressaccording
toninekeydomains(and72coreindicators)(Uddinetal.,2007).Theintentionistoincreaseaccess
tohealth,education,cleanwater,andelectricalpower(PennockandUra,2011)whilemaintaininga
balancebetweeneconomicgrowth,environmentalprotection,andthepreservationoflocalculture
andtraditions.ThisisseenasaMiddleWayaimedattemperingtheenvironmentalandsocialcosts
ofuncheckedeconomicdevelopment(Frame,2005;Taplinetal.,2013).
3.10.2.2 Indigenouspeoples
Indigenouspeoplesnumbermillionsacrosstheglobe(Daes,1996).Landandthenatural
environmentareintegraltotheirsenseofidentityandbelongingandtotheirculture,andare
essentialfortheirsurvival(Gilbert,2006;Xanthaki,2007).Theancestrallandsofindigenouspeoples
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contain80%oftheearthsremaininghealthyecosystemsandglobalbiodiversitypriorityareas,
includingthelargesttropicalforests(Sobrevila,2008).Becausetheydependonnaturalresources
andinhabitbiodiversityrichbutfragileecosystems,indigenouspeoplesareparticularlyvulnerable
toclimatechangeandhaveonlylimitedmeansofcopingwithsuchchange(Henriksen,2007;
PermanentForumonIndigenousIssues,2008).Theyareoftenmarginalizedindecisionmakingand
unabletoparticipateadequatelyinlocal,national,regional,andinternationalclimatechange
mechanisms.Yet,itisincreasinglybeingrecognizedthatindigenouspeoplescanimpartvaluable
insightsintowaysofmanagingmitigationandadaptation(Nakashimaetal.,2012),includingforest
governanceandconservingecosystems(Nepstadetal.,2006;HayesandMurtinho,2008;Pershaet
al.,2011).
3.10.2.3 WomenandClimateChange
Womenoftenhavemorerestrictedaccessto,andcontrolof,theresourcesonwhichtheydepend
thanmen.Inmanydevelopingcountries,mostsmallscalefoodproducersarewomen.Theyare
usuallytheonesresponsibleforcollectingwaterandfuelandforlookingafterthesick.Ifclimate
changeadverselyaffectscropproductionandtheavailabilityoffuelandwater,orincreasesill
health,womenmaybearadisproportionateburdenofthoseconsequences(Dankelman,2002;
UNEP,2011).
63
Ontheotherhand,theymaybebetteratadaptingtoclimatechange,bothathome
andinthecommunity.Butgiventheirtraditionalvulnerability,theroleofwomenacrosssocietywill
needtobereexaminedinagendersensitivemannertoensuretheyhaveequalaccesstoalltypes
ofresources(AgostinoandLizarde,2012).
3.10.2.4 Socialinstitutionsforcollectiveaction
Socialinstitutionsshapeindividualactionsinwaysthatcanhelpinbothmitigationandadaptation.
Theypromotetrustandreciprocity,establishnetworks,andcontributetotheevolutionofcommon
rules.Theyalsoprovidestructuresthroughwhichindividualscanshareinformationandknowledge,
motivateandcoordinatebehaviour,andactcollectivelytodealwithcommonchallenges.Collective
actionisreinforcedwhensocialactorsunderstandtheycanparticipateinlocalsolutionstoaglobal
problemthatdirectlyconcernsthem.
AsnotedinSections3.10.1.5and2.4,publicperceptionsofthecauseandeffectofclimatechange
vary,inbothdevelopedanddevelopingcountries,withsomeerroneousideaspersistingevenamong
welleducatedpeople.Studiesofperceptions(OConnoretal.,1999;Corneretal.,2012)
demonstratethatthepublicisoftenunawareoftherolesthatindividualsandsocietycanplayin
bothmitigationandadaptation.Theconceptsofsocialandpolicylearningcanbeusedinstimulating
andorganizingcollectiveaction.Sociallearninginvolvesparticipationbymembersofagroupin
discourse,imitation,andsharedcollectiveorindividualactions.Theconceptofpolicylearning
describestheprocessofadaptationbyorganizationstoexternalchangewhileretainingor
strengtheningtheirownobjectivesanddominationoverexistingsocioeconomicstructures(Adger
andKelly,1999).Thetaskofaneducationalprogrammeinmitigatingandadaptingtoclimatechange
istorepresentacollectiveglobalprobleminindividualandsocialterms.Thiswillrequirethe
strategiesfordisseminatingscientificinformationtobereinforcedandthepracticalimplications
advertisedinwaysthatareunderstandabletodiversepopulations(GonzlezGaudianoandMeira
Cartea,2009).
63
Naturaldisastersovertheperiod19812002revealedevidenceofagendergap:naturaldisasterslowered
womenslifeexpectancymorethanmens:theworsethedisasterandthelowerthewomanssocioeconomic
statusthebiggerthedisparity(NeumayerandPlmper,2007).
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3.11 Technologicalchange
Mitigationscenariosaimatsignificantreductionsincurrentemissionlevelsthatwillbebothdifficult
andcostlytoachievewithexistingtechnologicaloptions.However,costreducingtechnological
innovationsareplausible.Theglobalexternalitycausedbyclimatechangecompoundsmarket
failurescommontoprivatesectorinnovations.Appropriatepolicyinterventionsareaccordingly
neededtoencouragethetypeandamountofclimatefriendlytechnologicalchange(TC)thatwould
leadtosizablereductionsinthecostsofreducingcarbonemissions.Thissectionreviewstheories,
concepts,andprinciplesusedinthestudyofenvironmentallyorientedTC,andhighlightskeylessons
fromtheliterature,inparticular,thepotentialofpolicytoencourageTC.Examplesofsuccessand
failureinpromotinglowcarbonenergyproductionandconsumptiontechnologiesarefurther
evaluatedinChapters616.
3.11.1 MarketprovisionofTC
Aspollutionisnotfullypricedbythemarket,privateindividualslackincentivestoinvestinthe
developmentanduseofemissionsreducingtechnologiesintheabsenceofappropriatepolicy
interventions.Marketfailuresotherthanenvironmentalpollutionincludewhatisknownasthe
appropriabilityproblem.Thisoccurswheninventorscopyandbuildonexistinginnovations,and
reappartofthesocialreturnsonthem.Whilethenegativeclimatechangeexternalityleadstoover
useoftheenvironment,thepositiveappropriabilityexternalityleadstoanundersupplyof
technologicalinnovation.
64
Indeed,empiricalresearchprovidesampleevidencethatsocialratesof
returnonR&Darehigherthanprivateratesofreturn(Griliches,1992).Thus,thebenefitsofnew
knowledgemaybeconsideredasapublicgood(see,e.g.,Geroski,1995).
Imperfectionsincapitalmarketsoftendistortthestructureofincentivesforfinancingtechnological
development.Informationaboutthepotentialofanewtechnologymaybeasymmetricallyheld,
creatingadverseselection(HallandLerner,2010).Thismaybeparticularlyacuteindeveloping
countries.Theissueofpathdependence,acknowledgedinevolutionarymodelsofTC,pointstothe
importanceoftransformativeeventsingeneratingordivertingtechnologicaltrajectories(see
Chapters4and5).Evenendogenouslyinducedtransformativeeventsmaynotfollowasmoothor
predictablepathinrespondingtochangingeconomicincentives,suggestingthatcarbonpricepolicy
alonemaynotpromotethedesiredtransformativeevents.
3.11.2 Inducedinnovation
TheconceptofinducedinnovationpostulatesthatinvestmentinR&Disprofitmotivatedand
respondspositivelytochangesinrelativeprices
65
(Hicks,1932;BinswangerandRuttan,1978;
Acemoglu,2002).
66
InitialevidenceofinducedTCfocusedonthelinksbetweenenergypricesand
innovationandrevealedthelagbetweeninducedresponsesandthetimewhenpricechangescame
intoeffect,whichisestimatedatfiveyearsbyNewelletal.(1999)andPopp(2002)(seeChapter5).
Policyalsoplaysanimportantroleininducinginnovation,asdemonstratedbytheincreasein
applicationsforrenewableenergypatentswithintheEuropeanUnioninresponsetoincentivesfor
innovationprovidedbybothnationalpoliciesandinternationaleffortstocombatclimatechange
64
Forincrementalinnovations,thenettechnologyexternalitycanbenegative.Dependingonmarketstructure
andintellectualpropertyrules,theinventorofanincrementalimprovementonanexistingtechnologymaybe
abletoappropriatetheentiremarket,therebyearningprofitsthatexceedtheincrementalvalueofthe
improvement.
65
Itshouldbepointedoutthatineconomics,inducedinnovationtypicallymeansinnovationinducedby
relativepricedifferences.TheIPCCusesadifferentdefinition:innovationinducedbypolicy.
66
Ineconomics,inducedinnovationtypicallymeansinnovationinducedbyrelativepricedifferences.The
IPCCusesadifferentdefinition:innovationinducedbypolicy.
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(Johnstoneetal.,2010).Recentevidencealsosuggeststhatinternationalenvironmentalagreements
providepolicysignalsthatencouragebothinnovation(Dekkeretal.,2012)anddiffusion(Poppetal.,
2011).WiththeexceptionofChina,mostclimatefriendlyinnovationoccurredindeveloped
countries(Dechezlepretreetal.,2011).
67
3.11.3 LearningbydoingandotherstructuralmodelsofTC
Anextensiveliteraturerelatestoratesofenergycostreductionbasedontheconceptofexperience
curves(seeChapter6).Ineconomics,thisconceptisoftendescribedaslearningbydoing(LBD)to
describethedecreaseincoststomanufacturersasafunctionofcumulativeoutputorlearningby
using,reflectingthereductionincosts(and/orincreaseinbenefits)toconsumersasafunction
usingatechnology.Whilelearningcurvesarerelativelyeasytoincorporateintomostclimate
integratedassessmentmodels(IAMs),theapplicationofLBDhaslimitationsasamodelofTC(Ferioli
etal.,2009).Learningcurvesignorepotentialphysicalconstraints.Forexample,whilecostsmay
initiallyfallascumulativeoutputexpands,ifrenewableenergyisscaledup,theuseofsuboptimal
locationsforproductionwouldincreasecosts.Feriolietal.(2009)alsoprovideevidencethat
learningcanbespecifictoindividualcomponents,sothatthesavingsfromlearningmaynotfully
transferfromonegenerationofequipmenttothenext.Theythereforesuggestcautionwhen
extrapolatingcostsavingsfromlearningcurvestolongtermframesorlargescaleexpansions.
Similarly,inastudyoncostreductionsassociatedwithphotovoltaiccells,Nemet(2006)findsthat
mostefficiencygainscomefromuniversities,whichhavelittletraditionalLBDthroughproduction
experience.HendryandHarborne(2011)provideexamplesoftheinteractionofexperienceandR&D
inthedevelopmentofwindtechnology.
3.11.4 EndogenousandexogenousTCandgrowth
Withinclimatepolicymodels,TCiseithertreatedasexogenousorendogenous.Khleretal.(2006),
Gillinghametal.(2008)andPoppetal.(2010)providereviewsoftheliteratureonTCinclimate
models.
ExogenousTC(mostcommoninmodels)progressesatasteadyrateovertime,independentlyof
changesinmarketincentives.OnedrawbackofexogenousTCisthatitignorespotentialfeedback
betweenclimatepolicyandthedevelopmentofnewtechnologies.ModelswithendogenousTC
addressthislimitationbyrelatingtechnologicalimprovementsintheenergysectortochangesin
energypricesandpolicy.Thesemodelsdemonstratethatignoringinducedinnovationoverstatesthe
costsofclimatecontrol.
TheNordhaus(1977,1994)DICEmodelisthepioneeringexampleofaclimatepolicymodel
incorporatingTCintoIAMs.InmostimplementationsofDICE,TCisexogenous.Effortstoendogenize
TChavebeendifficult,mainlybecausemarketbasedspilloversfromR&Darenottakenintoaccount
whendecidinghowmuchR&Dtoundertake.RecentattemptstoendogenizeTCincludeWITCH
model(Bosettietal.,2006)andPopps(2004)ENTICEmodel.Popp(2004)showsthatmodelsthat
ignoredirectedTCdoindeedsignificantlyoverstatethecostsofenvironmentalregulation(more
detaileddiscussiononTCintheseandmorerecentmodelsisprovidedinChapter6).
Analternativeapproachbuildsonnewgrowththeories,whereTCisbyitsnatureendogenous,in
ordertolookattheinteractionsbetweengrowthandtheenvironment.PolicieslikeR&Dsubsidies
orcarbontaxesaffectaggregategrowthbyaffectingentrepreneursincentivestoinnovate.
Factoringinfirmsinnovationsdramaticallychangesourviewoftherelationshipbetweengrowth
andtheenvironment.MorerecentworkbyAcemogluetal.(2012)extendstheendogenousgrowth
67
GlobalR&DexpendituresamountedtoUSD1.107trillionin2007,withOECDnationsaccountingfor80%,
andtheU.S.andJapantogetheraccountingfor46%(NationalScienceBoard,2010).
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literaturetothecasewherefirmscanchoosethedirectionofinnovation(i.e.,theycandecide
whethertoinnovateinmoreorlesscarbonintensivetechnologiesorsectors).
68
Incontrast,LBDmodelsuselearningcurveestimatestosimulatefallingcostsforalternativeenergy
technologiesascumulativeexperiencewiththetechnologyincreases.Onecriticismofthesemodels
isthatlearningcurveestimatesprovideevidenceofcorrelation,butnotcausation.WhileLBDiseasy
toimplement,itisdifficulttoidentifythemechanismsthroughwhichlearningoccurs.Goulderand
Mathai(2000)provideatheoreticalmodelthatexplorestheimplicationsofmodellingtechnological
changethroughR&DorLBD(severalempiricalstudiesonthisarereviewedinmoredetailinChapter
6).
3.11.5 PolicymeasuresforinducingR&D
Correctingtheenvironmentalexternalityorcorrectingknowledgemarketfailurespresenttwokey
optionsforpolicyinterventiontoencouragedevelopmentofclimatefriendlytechnologies.Patent
protection,R&Dtaxcredits,andrewardinginnovationaregoodexamplesofcorrectingfailuresin
knowledgemarketsandpromotinghigherratesofinnovation.Ontheotherhand,policiesregulating
environmentalexternalities,suchasacarbontaxoracapandtradesystem,influencethedirection
ofinnovation.
Chapter15discussesinmoredetailhowenvironmentalandtechnologypoliciesworkbestintandem
(e.g.,Popp,2006;Fischer,2008;Acemogluetal.,2012).Forinstance,inevaluatingabroadsetof
policiestoreduceCO
2
emissionsandpromoteinnovationanddiffusionofrenewableenergyinthe
UnitedStateselectricitysector,Fischer&Newell(2008)findthataportfolioofpolicies(including
emissionpricingandR&D)achievesemissionreductionsatsignificantlylowercostthananysingle
policy(seeChapters7to13).However,GerlaghandvanderZwaan(2006)notetheimportanceof
evaluatingthetradeoffbetweencostsavingsfrominnovationandFischerandNewell(2008)
assumptionsofdecreasingreturnstoscaleduetospacelimitationsfornewsolarandwind
installations.
3.11.6 Technologytransfer(TT)
Technologytransfer(TT)hasbeenatthecentreofthescholarlydebateonclimatechangeand
equityineconomicdevelopmentasawayfordevelopedcountriestoassistdevelopingcountries
accessnewlowcarbontechnologies.ModesofTTinclude,tradeinproducts,knowledgeand
technology,directforeigninvestment,andinternationalmovementofpeople(Hoekmanetal.,
2005).PhasesandstepsforTTinvolveabsorptionandlearning,adaptationtothelocalenvironment
andneeds,assimilationofsubsequentimprovements,andgeneralization.Technologicallearningor
catchupthusproceedsinstages:importingforeigntechnologies;localdiffusionandincremental
improvementsinprocessandproductdesign;andmarketing,withdifferentpolicymeasuressuited
todifferentstagesofthecatchupprocess.
Leapfrogging,ortheskippingofsomegenerationsoftechnologyorstagesofdevelopment,isa
usefulconceptintheclimatechangemitigationliteratureforenablingdevelopingcountriestoavoid
themoreemissionsintensivestagesofdevelopment(WatsonandSauter,2011).Examplesof
successfullowcarbonleapfroggingarediscussedinmoredetailinChapter14.
Whetherproprietaryrightsaffecttransfersofclimatetechnologieshasbecomeasubjectof
significantdebate.Sometechnologiesareinthepublicdomain;theyarenotpatentedortheir
patentshaveexpired.Muchofthedebateonpatentedtechnologiescentresonwhetherthe
68
OtherworksinvestigatingtheresponseoftechnologytoenvironmentregulationsincludeGrblerand
Messner(1998),ManneandRichels(2004b),Messner(1997),Buonannoetal.(2003),Nordhaus(2002),Di
MariaandValente(2008),Bosettietal.(2008),Massettietal.(2009),GrimaudandRouge(2008),andAghion
etal.(2009).
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temporarymonopolyconferredbypatentshashamperedaccesstotechnology.Proponentsof
strongintellectualproperty(IP)rightsbelievethatpatentsenhanceTTasapplicantshavetodisclose
informationontheirinventions.Someclimatetechnologysectors,forexample,thoseproducing
renewableenergy,haveeasilyavailablesubstitutesandsufficientcompetition,sothatpatentson
thesetechnologiesdonotmakethemcostlyorpreventtheirspread(Barton,2007).Inotherclimate
relatedtechnologysectors,IPprotectioncouldbeabarriertoTT(Lewis,2007).(Thesubjectis
furtherdiscussedinChapters13and15.)
Variousinternationalagreementsonclimatechange,trade,andintellectualpropertyinclude
provisionsforfacilitatingthetransferoftechnologytodevelopingcountries.Climatechange
agreementsencourageparticipationbydevelopingcountriesandaddressbarrierstotheadoptionof
technologies,includingfinancing.However,somescholarshavefoundtheseagreementstobe
ineffectivebecausetheydonotincorporatemechanismsforensuringtechnologytransfersto
developingcountries(Moon,2008).(TheliteratureoninternationalcooperationonTTisfurther
discussedinChapters13,14and16.)
3.12 Gapsinknowledgeanddata
Asthischaptermakesclear,manyquestionsarenotcompletelyansweredbytheliterature.Soitis
prudenttoendourassessmentwithourfindingsonwhereresearchmightbedirectedoverthe
comingdecadesothattheAR6(shouldtherebeone)maybeabletosaymoreabouttheethicsand
economicsofclimatechange.
- Toplananappropriateresponsetoclimatechange,itisimportanttoevaluateeachofthe
alternativeresponsesthatareavailable.Howcanwetakeintoaccountchangesinthe
world'spopulation?Shouldsocietyaimtopromotethetotalofpeople'swellbeinginthe
world,ortheiraveragewellbeing,orsomethingelse?Theanswertothisquestionwillmake
agreatdifferencetotheconclusionswereach.
- Theeconomicsandethicsofgeoengineeringisanemergingfieldthatcouldbecomeofthe
utmostimportancetopolicymakers.Deeperanalysisoftheethicsofthistopicisneeded,as
wellasmoreresearchontheeconomicaspectsofdifferentpossiblegeoengineering
approachesandtheirpotentialeffectsandsideeffects.
- Todevelopbetterestimatesofthesocialcostofcarbonandtobetterevaluatemitigation
options,itwouldbehelpfultohavemorerealisticestimatesofthecomponentsofthe
damagefunction,morecloselyconnectedtoWGIIassessmentsofphysicalimpacts.
Quantifyingnonmarketvalues,thatis,measuringvaluationsplacedbyhumansonnature
andculture,ishighlyuncertainandcouldbeimprovedthroughmoreandbettermethods
andempiricalstudies.AsdiscussedinSection3.9,theaggregatedamagefunctionsusedin
manyIAMsaregeneratedfromaremarkablepaucityofdataandarethusoflowreliability.
- Thedevelopmentofregulatorymechanismsformitigationwouldbehelpedbymoreexpost
evaluationofexistingregulations,addressingtheeffectivenessofdifferentregulatory
approaches,bothsinglyandjointly.Forinstance,understanding,retrospectively,the
effectivenessoftheEuropeanUnionEmissionsTradingScheme(EUETS),theCaliforniacap
andtradesystem,ortheinterplaybetweenrenewablestandardsandcarbonregulationsin
avarietyofcountries.
- Energymodelsneedtoprovideamorerealisticportraitofmicroeconomicdecisionmaking
frameworksfortechnologychoice(energyeconomymodels).
- Aliteratureisemergingineconomicsandethicsontheriskofcatastrophicclimatechange
impacts,butmuchmoreprobingintotheethicaldimensionsisneededtoinformfuture
economicanalysis.
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- Moreresearchthatincorporatesbehaviouraleconomicsintoclimatechangemitigationis
needed.Forinstance,moreworkonunderstandinghowindividualsandtheirsocial
preferencesrespondto(ambitious)policyinstrumentsandmakedecisionsrelevantto
climatechangeiscritical.
- Despitetheimportanceofthecostofmitigation,theaggregatecostofmitigatingxtonnesof
carbongloballyispoorlyunderstood.Toputitdifferently,aglobalcarbontaxofxdollarsper
tonnewouldyieldy(t)tonnesofcarbonabatementattime,t.Wedonotunderstandthe
relationshipbetweenxandy(t).
- Thechoiceoftherateatwhichfutureuncertainclimatedamagesarediscounteddepends
ontheirriskprofileinrelationtootherrisksintheeconomy.Byhowmuchdoesmitigating
climatechangereducetheaggregateuncertaintyfacedbyfuturegenerations?
- Ashasbeenrecentlyunderscoredbyseveralauthors(Pindyck,2013;Stern,2013)aswellas
thisreview,integratedassessmentmodelshaveverysignificantshortcomingsforCBA,as
theydonotfullyrepresentclimatedamages,yetremainimportanttoolsforinvestigating
climatepolicy.TheyhavebeenwidelyandsuccessfullyappliedforCEAanalysis(Paltsevet
al.,2008;Clarkeetal.,2009;KreyandClarke,2011;Fawcettetal.,2013).Researchinto
improvingthestateoftheartofsuchmodels(beyondjustupdating)canhavehighpayoff.
3.13 FrequentlyAskedQuestions
FAQ3.1TheIPCCischargedwithprovidingtheworldwithaclearscientificviewofthe
currentstateofknowledgeonclimatechange.Whydoesitneedtoconsiderethics?
TheIPCCaimstoprovideinformationthatcanbeusedbygovernmentsandotheragentswhenthey
areconsideringwhattheyshoulddoaboutclimatechange.Thequestionofwhattheyshoulddoisa
normativeoneandthushasethicaldimensionsbecauseitgenerallyinvolvestheconflictinginterests
ofdifferentpeople.Theanswerrestsimplicitlyorexplicitlyonethicaljudgements.Forinstance,an
answermaydependonajudgementabouttheresponsibilityofthepresentgenerationtowards
peoplewhowillliveinthefutureoronajudgementabouthowthisresponsibilityshouldbe
distributedamongdifferentgroupsinthepresentgeneration.Themethodsofethicaltheory
investigatethebasisandlogicofjudgementssuchasthese.
FAQ3.2Dothetermsjustice,fairnessandequitymeanthesamething?
Thetermsjustice,fairnessandequityareusedwithsubtlydifferentmeaningsindifferent
disciplinesandbydifferentauthors.Justiceandequitycommonlyhavemuchthesamemeaning:
justiceisusedmorefrequentlyinphilosophy;equityinsocialscience.Manyauthorsusefairness
asalsosynonymouswiththesetwo.Inreportingontheliterature,theIPCCassessmentdoesnot
imposeastrictlyuniformusageontheseterms.Allthreeareoftenusedsynonymously.Section3.3
describeswhattheyreferto,generallyusingthetermjustice.
Whereasjusticeisbroadlyconcernedwithapersonreceivingtheirdue,fairnessissometimesused
inthenarrowersenseofreceivingonesdue(orfairshare)incomparisonwithwhatothersreceive.
Soitisunfairifpeopledonotallacceptanappropriateshareoftheburdenofreducingemissions,
whereasonthisnarrowinterpretationitisnotunfairthoughitmaybeunjustforonepersons
emissionstoharmanotherperson.Fairnessisconcernedwiththedistributionofgoodsandharms
amongpeople.DistributivejusticedescribedinSection3.3fallsunderfairnessonthenarrow
interpretation.
FAQ3.3Whatfactorsarerelevantinconsideringresponsibilityforfuturemeasuresthat
wouldmitigateclimatechange?
Itisdifficulttoindicateunambiguouslyhowmuchresponsibilitydifferentpartiesshouldtakefor
mitigatingfutureemissions.Incomeandcapacityarerelevant,asareethicalperceptionsofrights
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andjustice.Onemightalsoinvestigatehowsimilarissueshavebeendealtwithinthepastinnon
climatecontexts.Underbothcommonlawandcivillawsystems,thoseresponsibleforharmful
actionscanonlybeheldliableiftheiractionsinfringealegalstandard,suchasnegligenceor
nuisance.Negligenceisbasedonthestandardofthereasonableperson.Ontheotherhand,liability
forcausinganuisancedoesnotexistiftheactordidnotknoworhavereasontoknowtheeffectsof
itsconduct.IfitwereestablishedthattheemissionofGHGsconstitutedwrongfulconductwithinthe
termsofthelaw,thenatureofthecausallinktotheresultingharmwouldthenhavetobe
demonstrated.
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Mitigation of Climate Change Chapter3

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Mitigation of Climate Change Chapter3

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Working Group III Mitigation of Climate Change

FinalDraft Chapter3 IPCCWGIIIAR5

Box 3.1Dangerous interference with the climate system

Box 3.2Who mitigates versus who pays?

Box 3.3 The value of life.

Box 3.4Optimality versus Pareto improvement in climate change

Figure 3.2. Illustrating optimality versus Pareto improvement in climate change.

Box 3.7 Equivalence of emissions taxes and permit trading schemes

FinalDraft Chapter3 IPCCWGIIIAR5

Box 3.9 Uncertainty and damages: the fat tails problem

Box 3.10Could mitigation have a negative private cost?

Box 3.11Gross National Happiness (GNH)

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